APRIL 2022 PROFESSIONAL EXAMINATIONS

FINANCIAL REPORTING (PAPER 2.1)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

EXAMINER’S GENERAL COMMENT

Even though the performance is below expectation, it is nonetheless one of the best
performances in recent years. A good number of candidates scored between 60 and 85
percent. Some candidates also scored very low marks between 0 to 39%. The
performance of most candidates continues to show a lack of solid foundation and
skills needed for the paper. Meanwhile, the questions fell within the approved
syllabus of the Institute and the marks distribution was fair and in line with the
syllabus grid.

STANDARD OF THE PAPER

The standard of questions was appropriate for the level being assessed. The syllabus
coverage was good and provided candidates with enough flexibility to appropriately
respond to technical and current developments in Financial Reporting.

PERFORMANCE OF CANDIDATES
The performance of candidates again was found to be average even though it could
have been better, considering the quality of questions and the flexible marking scheme
adopted by the examiners during the coordination.
A little over 40% of the candidates scored marks between 50% and 85%. Majority of
the candidates scored marks below 50%. Some candidates performed poorly, scoring
as low as 0%. The poor performance of some can be attributed not only to inadequate
preparation by candidates for the paper, but also to the standard of quality attained
by candidates in previous tertiary institutions attended. Examiners did not sight any
signs of copying by candidates at any centre.

NOTABLE STRENGTHS OF CANDIDATES

Majority of the candidates who passed scored very high marks in questions four (4)
and five (5). In addition, some scored very good marks in question one (1). Very few
candidates also scored good marks in question three (3).

WEAKNESSES OF CANDIDATES
 The performance of candidates in question two demonstrated a lack of appreciation
of International Financial Reporting Standards (IFRSs). Candidates demonstrated a
pitiful understanding of interpretation and application of IFRSs. This lack of
understanding demonstrated by candidates on IFRSs is worrying. Most candidates
simply avoided question two which is solely on the application of IFRSs.
 Candidates appeared too ordinary. Their language and presentation lack technical
substance. Financial Reporting is a very technical paper and candidates without the
requisite technical knowledge will need to up their game.
 The comprehension of candidates on the subject needs considerable improvement.

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QUESTION ONE

The following financial statements relate to Stalky Ltd and Fanny Ltd:

Extract of Statement of Profit or Loss for the year ended 31 December 2020
Stalky Ltd Fanny Ltd
GH¢000 GH¢000
Profit before tax 15,400 8,900
Tax (5,600) (4,850)
Profit for the year 9,800 4,050

Statement of Financial Position as at 31 December 2020

Stalky Ltd Fanny Ltd
GH¢000 GH¢000
Assets
Non-current assets:
Property, plant and equipment 122,500 75,000
Investment in Fanny Ltd 58,000 -
180,500 75,000
Current assets (including loan advanced to Fanny Ltd) 69,500 44,900
Total assets 250,000 119,900
Equity and liabilities
Equity:
Ordinary share capital (issued @ GH¢0.50) 50,000 20,000
10% Preference share capital 5,300 2,500
Retained earnings 89,700 46,400
Other reserves 11,000 1,000
156,000 69,900

Non-current liabilities 35,000 14,000

Current liabilities (including loan from Stalky Ltd) 59,000 36,000
Total equity and liabilities 250,000 119,900

Additional information:
i) Stalky Ltd acquired 30 million ordinary shares of Fanny Ltd on 1 January 2019 when the
book value of Fanny Ltd’s share capital (i.e. including preference share capital) plus
reserves stood at GH¢58 million. Fanny Ltd has neither issued any share capital nor seen
any change in its other reserves since the acquisition of shareholdings by Stalky Ltd. The
recorded investment includes GH¢1.5 million due diligence costs incurred by Stalky Ltd to
facilitate its acquisition of Fanny Ltd. Stalky Ltd has no interest in Fanny Ltd’s issued
preference shares.
ii) Fair value exercise conducted at the time of Fanny Ltd’s acquisition revealed the following
matters:
 A piece of equipment with an actual carrying amount of GH¢10 million had an assessed
fair value of GH¢16 million. The estimated remaining useful economic life of this
equipment at acquisition was six years.
 An in-process research and development project existed at acquisition that met the
recognition criteria of IAS 38: Intangible Assets. At that date, the fair value of the project

Page 2 of 23
 was GH¢5 million. The project started to generate economic benefits a year ago and is
expected to contribute to the entity over a further four years.
 The above adjustments necessitated deferred tax provision of GH¢1 million at acquisition.
By 31 December 2019, the provision required had reduced to GH¢0.9 million, and by 31
December 2020 had decreased further to GH¢0.7 million.
Fanny Ltd has not yet incorporated the above fair value adjustments into its own financial
statements. Depreciation and amortization are charged to cost of sales.
iii) During the year, Stalky Ltd sold goods worth GH¢25 million to Fanny Ltd and made a
mark-up of one-third in arriving at the selling price. At 31 December 2020, inventories of
Fanny Ltd included GH¢4.8 million in respect of the goods supplied by Stalky Ltd. At 31
December 2019, Fanny Ltd’s inventories included GH¢3 million worth of goods purchased
from Stalky Ltd at the same mark up on cost. Ignore deferred tax implications on these
items.
iv) The trade receivables of Stalky Ltd included GH¢8 million receivable from Fanny Ltd.
This balance did not agree with the equivalent trade payable in the books of Fanny Ltd due
to payment of GH¢2 million made on 30 December 2020 by Fanny Ltd to Stalky Ltd.
v) The group’s policy is to measure the non-controlling interests in subsidiaries at fair value.
The fair value per ordinary share in Fanny Ltd at acquisition was GH¢1.50 and can be used
for this purpose. Goodwill was impaired by 10% for the year ended 31 December 2019. A
further impairment approximating 10% of the remaining goodwill is required in the current
period. All impairment losses are charged to operating expenses.

Required:
Prepare the Consolidated Statement of Financial Position as at 31 December 2020 for
Stalky Ltd Group.
(Total: 20 marks)

QUESTION TWO

a) BeGreen Ltd (BeGreen) is an agro-processing company which reports under International

Financial Reporting Standards (IFRSs) and prepares its financial statements up to 31
December each year. The company intends to comply fully with IAS 12 Income Taxes by
introducing deferred tax in its financial statements.

On 1 January 2020, the company acquired an item of plant which cost GH¢750,000 and
has a useful life of 5 years with no residual value. BeGreen enjoys capital allowance at the
rate of 30%. Revenue generated by using the plant is taxable, any gain on disposal of the
machine will be taxable and any loss on disposal will be deductible for tax purposes.
BeGreen estimates current tax provision for the year to 31 December 2020 at GH¢10,125.
The tax rate of BeGreen is 25%.

Required:
i) In accordance with IAS 12: Income Taxes, explain the amounts to be reported in the
Statement of Financial Position and Statement of Profit or Loss for the year ended 31
December 2020. (5 marks)
ii) Explain the term temporary difference and state ONE (1) circumstance in which temporary
difference may arise. (2 marks)

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b) Kundugu Ltd (Kundugu) is a manufacturing company located in the Savannah Region. The
reporting date of Kundugu is 31 December and the company reports under International
Financial Reporting Standards (IFRSs). Kundugu intends to expand its production to take
advantage of emerging economic activities in the new region.

On 1 January 2020, the company entered into a lease agreement for a production equipment
which has a useful economic life of 8 years. The lease term is for four years and Kundugu
agrees to pay annual rent of GH¢50,000 commencing on 1 January 2020 and annually
thereafter. The interest rate implicit in the lease is 7.5% and the lessee's incremental
borrowing rate is 10%. The present value of lease payments not yet paid on 1 January 2020
is GH¢130,026. Kundugu paid legal fees of GH¢1,000 to set up the lease.

Required:
Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for
2020 and 2021, showing how Kundugu should account for this transaction. (6 marks)

c) On 1 June 2020, Karikari Ltd received a Government of Ghana grant of GH¢8 million
towards the purchase of new plant with a gross cost of GH¢64 million. The plant has an
estimated life of 10 years and is depreciated on a straight-line basis. One of the terms of the
grant is that the sale of the plant before 31 May 2024 would trigger a repayment on a sliding
scale as follows:

Intended sale in the year ended: Repayment amount

31 May 2021 100%
31 May 2022 75%
31 May 2023 50%
31 May 2024 25%

The directors propose to credit the statement of profit or loss with GH¢2 million (GH¢8
million @ 25%) being the amount of the grant they believe has been earned in the year
ended 31 May 2021. Karikari Ltd accounts for government grants as a separate item of
deferred credit in its statement of financial position. Karikari Ltd has no intention of selling
the plant before the end of its useful economic life.

Required:
Explain with computations, the appropriate accounting treatment of the above transaction
in accordance with IAS 20 Government Grants and Disclosure of Government Assistance
in the financial statements of Karikari Ltd for the year ended 31 May 2021. (3 marks)

d) The recognition, measurement and disclosure of an Investment Property in accordance with

IAS 40: Investment Property appears straight forward. However, this could get
complicated when measured either under the fair value model or under the revaluation
model.

Required:
i) Define Investment Property under IAS 40 and explain the rationale behind its accounting
treatment. (2 marks)
ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model. (2 marks)

(Total: 20 marks)

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QUESTION THREE

The trial balance of Caput Plc, as at 31 December, 2020 is provided below:

GH¢’000 GH¢’000
Revenue 320,700
Cost of sales 215,700
Closing inventories (31/12/2020) (Note i) 15,750
Operating expenses 33,600
Income from Investment Property 1,800
Finance costs 6,300
Land and building at valuation (Note iii) 94,500
Plant and equipment at cost (Note iii) 54,000
Investment property (Note iii) 24,000
Accumulated depreciation on plant and equipment 25,200
(01/01/2020)
Trade receivables 20,250
Bank 11,850
Trade payables 17,700
Ordinary shares @ GH¢0.25 30,000
10% Redeemable preference shares @ GH¢1.00 15,000
Deferred Tax (Note iv) 7,800
Revaluation surplus 31,500
Retained earnings (01/12/2020) 26,250
475,950 475,950

The following information is provided:

i) An inventory count at 31 December 2020 amounted to GH¢15,750,000. This includes
damaged goods with a cost of GH¢1,200,000. These will require remedial work costing
GH¢675,000 and could be sold for GH¢1,425,000.

ii) Finance cost is made up of the full year’s preference and ordinary dividends paid.

iii) Non-Current Assets

 Land and Building were revalued at GH¢22,500,000 and GH¢72,000,000 respectively on
1 January 2020, resulting in revaluation gain of GH¢11,000,000 for the current year. At
that date, the remaining life of the building was 15 years. Depreciation is on straight line
basis. Ignore deferred tax implication.
 Depreciation on Plant and Equipment is at 12.5% on reducing balance basis.
 Investment Property: On 31 December 2020, a qualified surveyor valued the property at
GH¢20,250,000. Caput Plc uses fair value model under IAS 40: Investment Property to
value its investment property.
 It is the policy of the company to charge depreciation on full year basis.

iv) The directors have estimated the provision for income tax for the year ended 31 December
2020 at GH¢12,000,000. The deferred tax for the year ended 31 December 2020 is to be
adjusted sox that the tax base of the company’s net assets is GH¢18,000,000 less than the
carrying amount. Assume the rate of tax is 30%.

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v) On 1 October 2020, Caput Plc imported a piece of equipment from a European supplier for
€ 1million and agreed to settle the bill in six months’ time. The relevant exchange rates are
provided below:
Date Exchange Rate
1 October 2020 €1:GH¢6.20
31 December 2020 €1:GH¢6.50
1 April 2021 €1:GH¢6.40
No entries have been made for the above transaction. Any exchange difference on
translation should be debited or credited to operating expenses.

Required:
Prepare for Caput Plc:
a) Statement of Comprehensive Income for the year ended 31 December, 2020. (10 marks)
b) Statement of Financial Position as at 31 December, 2020. (10 marks)

(Total: 20 marks)

QUESTION FOUR

Abayie Ltd is a listed company in Ghana and operates many super markets in Ghana. The
following statements relates to Abayie Ltd for the year 2020:

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

2020 2019
GH¢'million GH¢'million
Revenue 1,255 1,220
Cost of sales (1,177) (1,145)
Gross profit 78 75
Operating expenses (21) (29)
Profit from operations 57 46
Finance cost (10) (10)
Profit before tax 47 36
Income tax (14) (13)
Net profit 33 23

Summarised Statement of Changes in Equity for the year ended 31 December 2020
2020 2019
GH¢'million GH¢'million
Opening balance 276 261
Profit for the period 33 23
Dividends (8) (8)
Closing balance 301 276

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 Statement of Financial Position as at 31 December 2020
2020
2020 2019
GH¢'million GH¢'million
Non-current Assets
Property, Plant & Equipment 580 575
Goodwill 100 100
680 675

Current Assets
Inventory 47 46
Receivables 12 13
Cash 46 12
105 71
Total Assets 785 746

Equity
Share Capital 150 150
Retained Earnings 151 126
301 276
Non-current Liabilities
Interest-bearing borrowing 142 140
Deferred tax 25 21
167 161

Current Liabilities
Trade and other payables 297 273
Short-term borrowing 20 36
317 309
Equity and Liabilities 785 746

Additional Information:
Key ratios for the supermarket sector (based on the latest available financial statement of
12 listed entities in the sector) are as follows:
 Gross Profit margin: 5.9%
 Return on Capital Employed (ROCE): 3.9%
 Net Assets Turnover: 1.93 times

Required:
Prepare a report addressed to the shareholders of Abayie Ltd, analysing the performance
and position of Abayie Ltd based on the financial statements and additional information
provided. The report should also include comparisons with key sector ratios (where
appropriate).
(Total: 20 marks)

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QUESTION FIVE

a) The IASB's Conceptual Framework identifies, among others, the qualitative characteristics
of relevance, faithful representation, comparability and understandability.

Required:
Justify with an example each how the qualitative characteristics will apply to the treatment
of tangible non-current assets. (10 marks)

b) In accordance with IAS 36: Impairment of Assets, an entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any of
such indications exist, the entity shall estimate the recoverable amount of the asset.
However, some assets would require mandatory testing for impairment.

Required:
Outline assets that require mandatory testing for impairment in accordance with IAS 36:
Impairment of Assets. (5 marks)

c) Michael Onipa, a Chartered Accountant is under pressure from his employees to under
declare sales for the year ended 2021 to save the company from paying the due tax for the
year. He has evaluated the threat to his professional obligations to comply with the
fundamental principles of good ethical behavior, as significant. He has therefore considered
safeguards to eliminate or reduce the threat to an acceptable level.

Required:
Discuss TWO (2) safeguards Michael Onipa could consider to either eliminate or reduce
the threats to an acceptable level. (5 marks)

(Total: 20 marks)

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SOLUTION TO QUESTIONS
QUESTION ONE
STALKY GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31
DECEMBER 2020
Non-current assets: GH¢000
Property, plant and equipment (122,500 + 75,000 + 6,000 – 2,000) 201,500
Research project (5,000 – 1,000wk2) 4,000
Goodwill (wk3) 4,860
210,360
Current assets (69,500 + 44,900 – 8,000 + 2000 – 1,200) 107,200
Total assets 317,560

Equity & liabilities

Ordinary share capital 50,000
10% Preference share capital 5,300
Retained earnings (wk5) 93,045
Other reserves 11,000
Non-controlling interests 19,515
178,860
Non-current liabilities (35,000 + 14,000 + 700 deferred tax) 49,700
Current liabilities (59,000 + 36,000 – 6,000) 89,000
Total equity & liabilities 317,560

Workings

1. Group Structure

Stalky Ltd
30𝑚
x 100
40𝑚
Group = 75%
NCI 25%

Fanny Ltd
Reporting date 31st December 2020
Acquisition date 1st January 2019
Post acquisition period – 2 years

Page 9 of 23
2. Net assets schedule – Fanny
Acquisition date Reporting date Post
GH¢000 GH¢000 acquisition
profit
Ordinary share capital 20,000 20,000 0
Retained earnings 34,500 46,400 11,900
(58,000 – 20,000 – 2,500 –
1,000)
Other reserves 1,000 1,000
Fair value adjustment – 6,000 6,000
plant (16,000 – 10,000)
Additional depreciation - (2,000) (2,000)
(6,000/6 = 1,000 x 2)
In-process research 5,000 5,000
Amortisation (5,000/5) - (1,000) (1,000)
Deferred tax (1,000) (700) 300
65,500 74,700 9,200

Note: additional depreciation for only current period should be added to cost of
sales. Hence, cost of sales is adjusted for GH¢1m (GH¢6m/6)

3. Goodwill:
GH¢000
Cost of investment (58,000 – 1,500 legal fees) 56,500
Fair value of NCI [(40,000 – 30,000) x 1.5] 15,000
71,500
Less: Sub’s net assets at acquisition (65,500)
Goodwill at acquisition 6,000
Impairment loss (for the year to 31/12/19) (600)
At 31/12/2019 5,400
Impairment loss (for the year to 31/12/20) (540)
Goodwill at reporting (31/12/2020) 4,860)

Note: Total impairment loss to date

(600 + 540) = 1,140

4. Non-controlling interest GH¢000

Fair value at acquisition 15,000
(40,000 – 30,000) x 1.5
Share of sub’s post-acquisition movements 2,300
(25% x 9,200)

100% of sub’s preference share capital 2,500

Impairment (25% x 1,140) (285)
At 31/12/2020 19,515

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 5. Retained earnings GH¢000
Parent: Balance b/d 89,700
Unrealized profit on inventory at end (1,200)
(1/4 x 4,800)
Due diligence costs (1,500)

Share of sub’s post-acq. earnings 6,900

(75% x 9,200)
Impairment (75% x 1,140) (855)
At 31/12/20 93,045

6. Unrealized profit
On yearend inventory (1/4 x 4,800) 1,200

On year start inventory (1/4 x 3,000) 750

Movement in provision for unrealized profit 350

EXAMINER’S COMMENTS
The performance of candidates on this question was surprisingly disastrous. Most
candidates failed to interpret and apply any single footnote. Majority of the candidates
could only score between 0% and 8%. Perhaps, candidates need to pay attention at
consolidation adjustments and how to account for them properly under examination
condition.
 Some students still use very old methods of consolidation. Though this is not wrong,
they failed to finish within time thereby scoring very low marks.
 It is advisable for candidates to adopt the net assets method as presented in this scheme.
It makes things easier for candidates.
 Some candidates could not determine the number of ordinary shares in the subsidiary
(divide the amount of share capital by the issue price). Hence, they could not determine
the correct group structure.

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QUESTION TWO
a)
i) Statement of Financial Position
BeGreen Ltd should recognise Non-current liability (deferred tax) of GH¢18,750
and a current liability (current tax) of GH¢10,125. (1 mark)

Statement of Profit or Loss

Recognise income tax expense of GH¢28,875 (i.e. GH¢10,125 + GH¢18,750)
(1 mark)
W1
Carrying amount of plant GH¢
Cost at 31/12/20 750,000
Depreciation (750,000/5yrs) (150,000)
Carrying amount at 31-12-20 600,000 (1 mark)

W2 Tax base of plant GH¢

Cost at 31/12/20 750,000
Capital allowance (750,000 x 30% (225,000)
Tax base at 31-12-20 525,000 (1 mark)

W2 Temporary difference GH¢

Carrying amount 600,000
Tax base (525,000)
Taxable temporary difference 75,000
Therefore deferred tax (temporary dif. x tax rate) (25% x GH¢75,000) = GH¢18,750
(1 mark)
Journal Entry
Debit Income tax expense GH¢18,750
Credit Deferred Tax liability GH¢18,750

ii) Temporary differences

IAS 12 defines temporary differences as the difference between the tax base of an
asset or liability and its carrying amount in the statement of financial position.
Temporary differences may arise in the following circumstances:
 Accounting depreciation does not equal tax-allowable depreciation (capital
allowances).
 An item of income or expense is included in the accounting profit in one period
but included in the taxable profit in another. For example, capitalized development
costs are amortised over several years in the financial statements, but tax relief is
given as the costs are incurred (on a cash basis).
 A right of use asset and lease liability may be recognised under IFRS 16 with the
lease payments being a chargeable deduction in the period paid under the tax
legislation of the relevant jurisdiction (meaning that the asset and liability would
not be recognised under the tax rules).
Explanation: 1 mark
Example: 1 mark

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b) Kundugu Ltd
Statements of financial position extract as at 31st December 2020
ASSETS 2021 2020
Non-current asset GHS GHS
Right-of-use asset 181,026 181,026
Accumulated Depreciation (45,257) (90,514)
135,769 90,512

Non-current liabilities
Lease liability 89,778 46,511

Current liabilities
Capital sum 40,248 43,267
Finance Charge 9,752 6,733
50,000 50,000

Kundugu Ltd
Statements of profit or loss extract for the year ended 31st December 2020
2021 2020
Expenses GHS GHS
Depreciation (181,026/4) (45,257) (45,257)
Finance costs (9,752) (6,733)

WI Lease liability
year Balance @ Lease Liability for Implicit Balance
start payments the year interest at end
@7.5%
2020 130,026 0 130,026 9,752 139,778
2021 139,778 (50,000) 89,778 6,733 96,511
2022 96,511 (50,000) 46,511 3,488 50,000
2023 50,000 (50,000) 0 0 0

W2 Right of use asset

Lease liability @ start 130,026
Lease payment at 1 January 2020 50,000
Initial direct cost 1,000
181,026

Annual depreciation = GHS181,026 ÷ 4 years GHS 45,257

Initial recognition of right-of-use asset 1 mark
Initial recognition of lease liability 0.5 marks
Lease schedule 1.5 mark
SOFP (Extract) 2 marks
SOPL (Extract) 1 mark
6 marks

Page 13 of 23
c) 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 intended to sell the related plant, which they do not
intend to do so.
Therefore, in the year ended 31st May 2021, GH¢800,000 (8 million/10 years)
should be credited to the statement of profit or loss and GH¢7·2 million should be
shown as deferred income (GH¢800,000 current and GH¢6·4 million non-current)
in the statement of financial position.
1 mark per valid point up to maximum of 3 marks

d)
i) An investment property is land or buildings (or a part thereof) held by the owner
to generate rental income or for capital appreciation (or both) rather than for
production or administrative use. It would also include property held under a
finance lease and may include property under an operating lease, if used for the
same purpose as other investment properties.
Generally, non-investment properties generate cash flows in combination with
other assets, whereas a property that meets the definition of an investment
property means that it will generate cash flows that are largely independent of the
other assets held by an entity and, in that sense, such properties do not form part
of the entity’s normal operations.
(2 marks)

ii) The revaluation model and fair value sound very similar; both require properties
to be valued at their fair value which is usually a market-based assessment (often
by an independent valuer). However, any gain (or loss) over a previous valuation
is taken to profit or loss if it relates to an investment property, whereas for an
owner-occupied property, any gain is taken to a revaluation reserve (via other
comprehensive income and the statement of changes in equity). A loss on the
revaluation of an owner-occupied property is charged to profit or loss unless it
has a previous surplus in the revaluation reserve which can be used to offset the
loss until it is exhausted. A further difference is that owner-occupied property
continues to be depreciated after revaluation, whereas investment properties are
not depreciated.
(2 marks)

(Total: 20 marks)
EXAMINER’S COMMENTS
This question has always been the bane of pitiful performance by candidates. Over
95% of candidates failed to answer or properly answer this question. Considering that
the question usually consists of various IFRSs, the continuous abysmal performance
by candidates is a very clear indication of their knowledge level on IFRSs.
ai) tested candidates’ understanding on the calculation of deferred tax and the
treatment of income taxes in the financial statements in accordance with IAS 12
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 Income Taxes. Candidates were required to calculate the net book value (carrying
amount) and tax net book value (tax base) and find the difference between the two
values (temporary difference). The difference multiplied by tax rate is deferred tax.
 Few candidates scored all marks available
 Most candidates were clueless about the subject matter being examined

aii) required candidates to define temporary difference and give two examples.
 Most candidates could not explain it.
 Most candidates did not attempt it
 Very few candidates were able to answer it correctly.

The b) part of the question was on accounting for a lease transaction in the books of
the lessee in accordance with IFRS 16.
 The lease liability was provided, but some candidates decided to calculate it. They did
not only get it wrong but wasted precious time.
 Majority of candidates could not calculate the right of used asset.
 The lease amortisation table was problematic to candidates.
 Very few candidates attempted it and got a pass mark.

Sub-question c) tested candidates’ ability to account for government grant in

accordance with IAS 20
 This was poorly answered.
 Majority did not attempt it.

The d) required explanation of the meaning of Investment Property

 Surprisingly, candidates could not explain the meaning of Investment property.
 Candidates demonstrated very shallow knowledge of Investment property.

Page 15 of 23
QUESTION THREE
a)
CAPUT LIMITED
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31/12/2020
GH¢’000
Revenue 320,700
Cost of sales (225,325)
Gross profit 95,375
Income from investment property 1,800
Total income 97,175
Operating expenses (33,600 +300 exchange loss) (33,900)
Fair value loss on investment property (24,000-20,250) (3,750)
Profit before interest and tax 59,525
Finance cost (6,300-4,800 ordinary dividends) (1,500)
Profit before tax 58,025
Ttaxation (9,600)
Profit after tax 48,425
Other comprehensive income:
Gain on revaluation - PPE 11,000
Total comprehensive income 59,425

b)
CAPUT LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31/12/2020
GH¢’000 GH¢’000
Non-current assets
Property plant and equipment 120,325
Investment property 20,250
140,575
Current assets
Inventory (15,750-450) 15,300
Trade receivables 20,250
Bank 11,850
47,400
Total Assets 187,975

Current liabilities
Trade payables (17,700+6,500(w6)) 24,200
Current tax liability 12,000
36,200
Non-current liabilities
Deferred tax liability 5,400
10% Redeemable Preference shares 15,000
56,600

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 Equity
Stated capital (ordinary shares @ .25) 30,000
Retained earnings (26,250 +48,425-4,800
dividends) 69,875
Revaluation surplus 31,500
131,375
Total Equity and Liabilities 187,975

WORKINGS:
1. Depreciation
GH¢’000
Buildings (72,000/15) 4,800
Old plant and equipment (12.5% x (54,000-25,200)) 3,600
New plant and equipment (12.5% x 6,200(w5)) 775
9,175

2. Cost of Sales
GH¢’000
Per trial balance 215,700
Write down (below) 450
Depreciation charge for the year 9,175
225,325
Inventory
GH¢’000
Cost 15,750
Damaged goods:
Cost 1,200
NRV (1,425-675) (750)
Write down (450)
Value at year end 15,300

3. Property Plant and Equipment

Plant and
Land and Building Equipment Total
GH¢’000 GH¢’000 GH¢’000
Cost/Valuation (1/01/20) 83,500 54,000
Accumulated depreciation - 25,200
NBV (1/1/20) 83,500 28,800
Revaluation gain 11,000 - 11,000
Addition - 6,200 6,200
Depreciation 4,800 4,375 9,175
NBV (31/12/20) 89,700 30,625 120,325

Depreciation charge on building per annum = 72 m/15 years = 4.8 m

Depreciation charge on Plant and Machinery is 12.5% x (54 m-25.2 m) = 3.6 m

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4. Taxation
i) Income tax
Current charge for the year GH¢’000
Current charge for the year 12,000
Decrease in deferred Tax (2,400)
Charge to SPL 9,600

ii) Deferred Tax GH¢’000

Balance b/d 7,800
Decrease in deferred Tax (2,400)
Balance c/d 5,400

NB: Deferred tax liability at year end = 30% x 18,000,000 (temporary timing
difference) = GH¢5,400,000.

5. Foreign currency translation

At 1/10/2020 GH¢’000
Dr: Equipment (100,000 x 6.2) 6,200
Cr: Payables 6,200

Note: the non-monetary item is not subject to retranslation but the foreign
currency payable should be retranslated as follows:

Payables GH¢’000
At 1/10/2020 6,200
Exchange loss (balance) 300
At 31/12/2020 (1,000,000 x 6.50) 6,500

6. Finance cost
Finance cost is stated less the ordinary dividends of GH¢4,800,000 (i.e. 6,300,000
less preference dividends of GH¢1,500,000), as well as the net interest on defined
benefit plan GH¢10,000 (i.e. GH¢20,000 interest cost – GH¢10,000 return on plan
assets).
GH¢’000
Per trial balance 6,300
Dividends (ordinary) (4,800)
10% x15,000 Preference shares 1,500

80 ticks @ 0.25
(Total: 20 marks)

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 EXAMINER’S COMMENTS
This question was on final account of non-group limited liability company
incorporating IFRSs. This was a very straight forward question that was not so
demanding.
 Some candidates could not simply present the format for a statement of profit or loss
or statement of financial position.
 Many candidates did not attempt this question.
 Very few candidates scored good marks in this question

QUESTION FOUR

REPORT
To: Shareholders of Abayie Limited
From: Management accountant
Date: 31/12/2020
Subject: Performance and position of Abayie Limited

Introduction
As requested, I have analyzed the performance and position of Abayie. My
analysis is based on extracts from the financial statements for the year ended 31
December 2020 with comparative figures for the year ended 31 December 2019. A
number of key measures have been calculated and these are set out in the attached
Appendix.

Profitability
Gross profit margin has increased very slightly during the year and this is a little
above the industry average. However, although net profit margin has increased
significantly during the year, this is still below the industry average. The increase
in net profit margin has occurred because operating expenses have fallen by over
a quarter in 2020. The operating profit margin has risen from 3.8% in 2019 to 4.5%
in 2020.

Given the information available, the mostly likely cause of this fall is the increase
in asset lives and the resulting reduction in the depreciation expense. As might be
expected, the company has a considerable investment in property, plant &
equipment and depreciation would normally be significant expense. An increase
in asset is relatively unusual and it is possible the directors have used this method
to deliberately improve the operating and the net profit margins. (They may have
been particularly concerned that the net profit margin has obviously been well
below the industry average.)

On the other hand, the directors may have carried out their review of assets lives
in good faith or there could be another legitimate reason why operating expenses

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have fallen. For example, the 2019 figure may have been inflated by a significant
“one off” expense.

Other Matters
Non-current asset turnover has improved slightly, but still below the industry
average. This suggests that the company uses its asset less efficiently than others
in the same sector. However, increasing the asset lives will have reduced the ratio
for 2020; it is possible that the company’s asset turnover would have approached
the sector average had the review not been carried out. It is possible that most of
the investment in new property was made during 2019.
The current ratio for both years is extremely low. Supermarkets often do have
relatively low current and quick ratios, but no average figure for the industry is
available, so it is difficult to tell whether this is normal for the type of operation.

Short-term liquidity appears not to be a problem because the company has a

positive cash balance which has increased in the year. However, the appearance of
the statement of financial position suggests that this has been achieved by delaying
payment to suppliers. Trade and other payables have increased by nearly 9%,
while revenue and cost of sales have only increased by approximately 3%.
The debt-to-equity ratio has fallen in the year and gearing does not appear to be a
problem.

Conclusion
Abayie’s profit margins appear to be reasonable for a company in its industry
sector. Although its net profit margin is below the industry average, this is
improving. There are no apparent short-term liquidity problems.

It is possible at least some of this improvement has been achieved by deliberately

reducing the operating expenses for the year. If, as seems likely, the directors wish
to sell their interest in the company in the near future, improved results will help
to secure a better price.
However, it is impossible to be certain that this has happened without much more
detailed information about the reason for the fall in operating expenses. There may
be legitimate explanation for the improvement in the company’s profit margins.

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 APPENDIX

KEY SECTOR
2020 2019 RATIO
Gross profit
margin 78/1,225 X 75/1,220 X 5.90%
100%=6.2% 100%=6.1%

Net profit margin 57/1,255 X 46/1,220 X -

100%=4.5% 100%=3.8%

ROCE 33/1,255 X 23/1,220 X 3.90%

100%=2.6% 100%=1.9%

Net assets 1,255/680 1,220/675 1.93 times

turnover 1.85 times 1.81 times

current ratio 105/317 71/309 -

=0.33:1 =0.23:1

Debt/Equity 142/301 X 140/276 X

100%=47.2% 100%=50.7% -

Receivable collection period

Payable payment period
Inventory turnover
5 marks each for computation of rations for each year x 2 years = 10 marks
3 marks each for commentary on sales, profitability and other matters x 3 = 9
marks
1 mark for conclusion = 1 mark
20 marks

EXAMINER’S COMMENTS
Financial Statement analysis using ratios. Candidates were asked to analyse the
Financial Performance and Financial Position. The question however provided some
key sector ratios which were on financial performance only. This caused confusion
among candidates.
 Some candidates did not know how to substitute figures from the financial statements
into the equation.
 Some candidates were able to calculate correct ratios but they could not analyse them.

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QUESTION FIVE

a) Qualitative characteristics as applicable to tangibles non-current assets illustrated

by IAS 16
Relevance
The choice of the revaluation model as a measurement model in IAS 16 provides
relevant information by showing up-to-date values. This will help give an
indication as to what the entity's underlying assets are worth. Revaluations should
be applied to all assets in a class, not just those with positive changes.

Faithful representation
Although the revaluation model gives relevant information this information is
generally seen to be a less faithful representation than the cost model – the other
measurement model allowed by IAS 16. The cost model is based on historic costs
which are not the most relevant costs on which to base future decisions. However,
historic cost is based on fact, so can claim to represent that which it purports to
represent. The recognition criteria of IAS 16, setting out what may be recognised
as part of the cost of an item of property, plant and equipment also aids verifiability
of the resultant figure.

Comparability
The standard 'rules' laid down in IAS 16 mean that the financial statements of
different companies can be compared as they have been prepared on the same
basis. IAS 16 also facilitates comparability between companies by requiring the
disclosure of accounting policies (in accordance with IAS 8) in respect of, for
example, depreciation methods and measurement bases. It also requires the
disclosure of both carried forward and brought forward figures, aiding
comparability between this year and the previous year. IAS 16 allows
comparability between the cost and the revaluation model (for example to facilitate
comparison between two companies who have adopted different models) by
requiring equivalent cost information to be disclosed under the revaluation model.
It also requires disclosures (in accordance with IAS 8) of the effect of a change in
an accounting estimate such as useful lives or depreciation rates. This facilitates
comparison.

Understandability
To improve understandability IAS 16 requires disclosures to be given by each class
of property, plant and equipment so it will be clear what types of asset have been
purchased during the year and what types of assets have been sold. If this
information was merged over one class, it would be less understandable. The
format of the property, plant and equipment 'table' also aids understandability
(with the movement on each class of assets clearly set out) and the disclosure of
depreciation policies aids an understanding of asset lives.
(4 points @ 2.5 marks each = 10 marks)
b) Irrespective of whether there is any indication of impairment, an entity shall:
 test an intangible asset with an indefinite useful life or
 an intangible asset not yet available for use
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 test goodwill acquired in a business combination for impairment annually by
comparing its carrying amount with its recoverable amount.
(5 marks)

c) Safeguards Michael Onipa could consider to either eliminate or reduce the

threats to an acceptable level.
 Self-Interest Threats - Self-interest threats may occur as a result of Mr. Onipa’s
financial interest. This might be his only source of employment. He might have
concerns about employment security. Such financial interests might cause Mr.
Onipa to be reluctant to take actions that would be against his own financial
interests.

Safeguards may include consultation with superiors within the employing

organisation, for example, the audit committee or other body responsible for
governance, or with ICAG.

 Advocacy Threats – Mr. Onipa as an employee is expected to promote the

employer’s position by providing financial information as long as information
provided is neither false nor misleading. Any false or misleading information
might create an advocacy threat.
As a safeguard, Mr. Onipa should refuse to remain associated with information
that may be misleading. If the pressure is persistent, should consider informing
appropriate authorities in line with the guidance in this code of ethics. He may also
wish to seek legal advice or resign.

 Intimidation Threats - Intimidation threats occur when a Mr. Onipa entertain fears
that there is an aggressive and dominating pressure from his employer to act
unethically. There might be threat of dismissal or replacement over a disagreement
about the application of an accounting principle or the way in which financial
information is to be reported.

 Safeguards may include consultation with audit committee, if they have one, the
board, or with ICAG. He may also wish to seek legal advice or resign.
(Any 2 points @ 2.5 marks each = 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This was a theory question on a number of areas. The performance was average.
a) was on IASB Conceptual Framework characteristics of financial information.
For b), candidates were to demonstrate knowledge of mandatory testing for
impairment
c) was on code of ethics. Specifically, candidates were required to identify the
safeguards to eliminate or reduce threats from a given scenario and explain them.
Most candidates rather attempted explaining the fundamental ethical principles.

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