MARCH 2023 PROFESSIONAL EXAMINATIONS

FINANCIAL REPORTING (PAPER 2.1)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

EXAMINER’S GENERAL COMMENTS

The financial reporting syllabus assumes knowledge acquired in Financial
Accounting, and develops and applies this further and in greater depth. The syllabus
begins with the regulatory, conceptual and ethical framework of accounting. Other
areas of the syllabus cover the reporting of financial information for single companies
and for groups in accordance with relevant international financial reporting
standards. Finally, the syllabus covers the analysis and interpretation of information
from financial reports.

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, candidates performed better in the March 2023 diet than the December
2022 diet, with a 38.33% pass rate as against 19.97% respectively.
It appears few high performers were concentrated at some centres though average
performance were spread across centers. There was no sign of copying and other
examination malpractice.

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QUESTION ONE

Below are the financial statements of Panin, Kakra and Tawia.

Statements of financial position as at 31 December 2021
Panin Kakra Tawia
GH¢million GH¢million GH¢million
Assets
Property, plant & equipment 229.5 162.0 84.0
Investment:
In Kakra 90.0
In Tawia 32.0
Current assets 80.5 64.0 52.0
432.0 226.0 136.0
Equity and liabilities
Share capital (GH¢1 per ordinary share) 52.8 30.0 20.0
Revaluation reserves 10.0 6.5 2.0
Retained earnings 274.0 145.0 76.0
336.8 181.5 98.0
Current liabilities 95.2 44.5 38.0
432.0 226.0 136.0

Additional information:
i) On 1 January 2021, Panin acquired 27 million equity shares in Kakra. As a consideration,
Panin transferred a parcel of land with carrying value of GH¢90 million and fair value of
GH¢96 million to the shareholders of Kakra. The only entries made by Panin for this
transfer were to debit “investment in Kakra” and credit “property, plant and equipment”
with the carrying value of the land. The balances on Kakra’s retained earnings and
revaluation reserves at this date were GH¢72 million and GH¢5.5 million respectively.

ii) On 1 January 2021, Kakra’s internally developed brand had a fair value of GH¢11 million.
The brand has an indefinite useful life, but at year-end its value-in-use was assessed at
GH¢8 million.

iii) On 1 July 2021, Panin also acquired 5 million equity shares in Tawia for GH¢32 million.
In the post-acquisition period, Tawia earned profit of GH¢10 million after tax and dividend
and revaluation gains of GH¢500,000 after tax.

iv) In 2021, Kakra made intercompany sales to Panin for GH¢7.8 million, making a profit of
25% on cost, and GH¢1.2 million of these goods were in inventory as at 31 December 2021.
Kakra also made intercompany sales to Tawia for GH¢1.5 million, making a profit of
331/3% on cost. The entire consignment remained in inventory of Tawia as at 31 December
2021.

As a result of these inter-company transactions, closing payables for Panin and Tawia
included GH¢1 million and GH¢400,000 respectively as owing to Kakra. The figures
agreed with the corresponding receivables in Kakra’s books.

v) Also included in the current liabilities of Kakra and Tawia, are dividends payable of GH¢4
million and GH¢1.6 million respectively. Both dividends were declared out of post-
acquisition profits. Panin has not yet taken credit for its share of these dividends.

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vi) On 1 January 2021, Panin sold a group of machines to Kakra at their agreed fair value of
GH¢8 million. At the time of the sale, the carrying value of the machines were GH¢6
million. The estimated remaining life of the machines at the date of the sale was four years.
However, the policy of Kakra is to depreciate these machines using 20% per annum.

vii) Goodwill should be charged with impairment loss of 10%.

viii) It is the policy of the group to value non-controlling interests at their proportionate share
of fair value of subsidiary’s identifiable net assets.

Required:
Prepare a Consolidated Statement of Financial Position of Panin Group as at 31 December
2021.
(Total: 20 marks)

QUESTION TWO

a) On 1 January 2022, Anto Ltd sold heavy duty machines costing GH¢4.5 million to Nkwaso
Ltd for GH¢7.5 million, receivable in full on 1 April 2023. Nkwaso Ltd obtained control
of the machines at the contract inception. The terms of the contract allowed the customer
to return the machines within three (3) months. The machines are new and Anto Ltd has no
relevant historical evidence of product returns or other available market evidence.

Based on their individual credit profiles at the transaction date, Anto Ltd and Nkwaso Ltd
would have been charged borrowing rate of 15% and 20% respectively.

Required:
In line with IFRS 15: Revenue from Contract with Customers, explain the correct
financial reporting treatment of the above for the year ended 31 March 2022. (7 marks)

b) Nkonya is a local fruit processing company whose accounting year is December 2021 and
prepares its financial statements using IFRSs. On 1 April 2021 Nkonya moved to a new
head office and decided to sell its old premises. Agents were appointed to assist with the
sale. As at 1 January 2021, the old premises had a carrying amount of GH¢8.4 million. The
old premises had cost GH¢10 million and were being depreciated over their expected useful
life of 50 years. The agents advised the directors that the market value of the old premises
at 1 April 2021 was GH¢7 million and a commission of 1% was payable on sale. No entries
have yet been made in respect of the old premises for the year ended 31 December 2021.
The old premises remained unsold as at 31 December 2021, but the sale was finalised on
10 January 2022 for net proceeds of GH¢6.8 million.

Required:
Show how the property should be dealt with in the financial statements of Nkonya for the
year ended 31 December 2021. (7 marks)

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c) The Financial Accountant of Abodie Ltd is finalising the financial statements of Abodie
Ltd for the year ended 31 August 2021. The following items are being considered for
deferred tax purpose:
 At year end, Abodie Ltd's property, plant & equipment had tax base and carrying value of
GH¢72 million and GH¢95 million respectively.

 The company's provision for decontamination costs was GH¢11 million (appropriately
discounted) at the year end. Decontamination costs are tax deductible when paid.

 The company had inventory with carrying value of GH¢24 million. This did not agree with
the tax base because of GH¢3 million write-down for obsolete items. Tax relief is only
granted for inventories upon sale.

 The company incurred GH¢15 million in respect of new software development during the
year which was capitalised and will be amortised over the next 5 years. Full year’s charge
is required in the first year of completion or purchase. This cost was deducted in the current
year for tax purposes. The company is liable for income tax at 30%.

Required:
Compute the company's deferred tax liability at 31 December 2021. (6 marks)

(Total: 20 marks)

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QUESTION THREE

Kinbuka Ltd has been in operation for the past five years. As a Public Listed Entity, the
company uses full IFRSs in preparing its financial statements. Management of the company
is preparing financial statements for the year ended 31 December 2021, and has produced
the following trial balance for the period.
GH¢ GH¢
Revenue 1,171,000
Inventories (31/12/2020) 80,000
Purchases 543,000
Administrative expenses 180,000
Marketing & distribution expenses 55,000
Non-current assets (cost)-31/12/2020: Note (ii)
Furniture & fittings 88,000
Motor vehicles 180,000
Office equipment 30,000
Intangible assets 50,000
Accumulated depreciation -31/12/2020: Note (ii)
Furniture & fittings 18,000
Motor vehicles 62,400
Office equipment 13,000
Intangible assets 6,000
Taxation account Note (iii) 28,000
Trade & other receivables 151,000
Trade payables 125,000
Deferred tax- 31/12/2020 Note (iii) 21,000
13% GOG Bond Note (iv) 19,000
Interest income Note (iv) 2,600
Bank account Note (v) 283,000
Share Capital 200,000
Retained earnings 68,000
1,687,000 1,687,000

The following additional information is relevant in preparing the financial statements of

the company for the year ended 31 December 2021:
i) Inventories at 31 December 2021 were valued at GH¢65,000.

ii) On 1 November, 2021, one of the company’s vehicles used in selling and distributing its
finished goods was involved in an accident; the vehicle was badly damaged beyond repairs
as a result of the accident. This vehicle was acquired by the company on 1 January, 2019
for GH¢95,000. The company, however, has insured the vehicle and thus on 4 November,
2021 wrote to the insurance company for the claim, to purchase a new vehicle. In response,
the Insurance company picked and assessed the damaged car, and on 8 January 2022 paid
the company a claim of GH¢80,000.

There were no other changes in non-current assets for the year ended 31 December 2021.
Non-current assets are depreciated or amortised as follows:
Furniture & fittings 20% of cost
Office equipment, Motor vehicles and intangible assets 10% of cost

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 No depreciation is charged on non-current assets in the year of de-recognition. Depreciation
or amortisation expense is charged to cost of sales.

iii) Taxation account represents the aggregate amount paid by the company as self-assessment
tax on its estimated profit for the four-quarters of the 2021 year of assessment. Kinbuka
Ltd in the year 2021, had officers of Ghana Revenue Authority (GRA) auditing its tax
records for the 2019 and 2020 years of assessment. All the prior years before the 2019 year
of assessment have already been audited by GRA. The audit report of GRA received and
agreed by Kinbuka Ltd in November 2021 revealed the following:
Year of Current tax provided for Tax liability for the year
Assessment the year from Tax audit
GH¢ GH¢
2019 45,000 43,000
2020 57,800 67,600

The company paid in full the current tax provided for the years 2019 and 2020 in the first
half of the years 2020 and 2021 respectively. However, the differences arising from the tax
audit have not been provided for in the above balances and are yet to be settled by the
company. Current tax expense and increase in deferred tax liability for the year ended 31
December, 2021 have been estimated at GH¢35,300 and GH¢3,750 respectively.

iv) As part of cash flow management, the company at the beginning of the current year,
purchased a 13%, GH¢20,000 5-year bond at a price of GH¢19,000, incurring brokerage
fee of 2% of the par value. The bond will be redeemed at a premium of 5% over its par
value. The brokerage fee paid is included in the administrative expenses. The business
model of Kinbuka Ltd in relation to this bond is to hold it till maturity while availing itself
to sell when there is a good opportunity to do so. The effective interest rate of the bond is
15% and its fair value at 31 December 2021 is GH¢21,000.

v) Bank account represents the cash book balance as at 31 December 2021. The Bank
statement, however, reveals a balance of GH¢353,000 as at this date. There are only two
reconciling differences between the two figures: Cheques recorded at the credit side of the
cash book but yet to be presented to Bank for payment and bank charges yet to be recorded
in cash book. The value of cheques yet to be presented to Bank for payment is GH¢72,000.
All bank charges are classified as administrative expenses.

Required:
Prepare the Statement of Profit or Loss and Other Comprehensive Income of Kinbuka
Ltd for the year ended 31 December, 2021 and the Statement of Financial Position as at
that date. Show clearly all relevant workings.
(Total: 20 marks)

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QUESTION FOUR

Boomu Ltd is an agro-processing company with strong competition from Sintim Ltd. The
Board of Directors of Boomu Ltd wants to measure the performance of the company against
its competitor. Below are the statement of comprehensive income of the two companies for
the year ended 31 December 2021, and the statement of financial positions as at that date.
Statement of Comprehensive Income
Boomu Ltd Sintim Ltd
GH¢000 GH¢000
Revenue 619,085 956,200
Cost of sales (424,700) (762,400)
Gross profit 194,385 193,800
Administrative expenses (58,635) (84,940)
Other income 6,335 9,270
Operating profit 142,085 118,130
Finance cost - (3,000)
Profit before income tax 142,085 115,130
Income tax expense (23,460) (34,220)
Profit for the year 118,625 80,910

Statement of Financial Position

GH¢000 GH¢000
Non-current assets
Property-plant & equipment 231,636 197,884
Intangible asset 105,320 111,928
336,956 309,812
Current assets
Inventories 33,960 37,480
Trade receivables 26,216 3,836
Cash and cash equivalents 91,328 42,472
151,504 83,788
Total assets 488,460 393,600

Equity & Liabilities:

Share capital 20,000 30,000
Retained Earnings 390,536 283,820
410,536 313,820
Non-current liability
Deferred taxation 18,120 13,948
20% Loan notes - 30,000
18,120 43,948
Current liabilities
Trade and other payables 42,904 28,040
Current tax 16,900 7,792
59,804 35,832
Total equity & liabilities 488,460 393,600

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 Required:
As the Finance Manager of the company, write a report to the Board of Directors, assessing
the comparative performance of the company for the year ended 31 December 2021 using
ratio analysis. Your report should use THREE (3) profitability ratios, TWO (2) liquidity
ratios, THREE (3) efficiency ratios and TWO (2) gearing ratios.
(Total: 20 marks)

QUESTION FIVE

a) The Conceptual Framework for Financial Reporting identifies faithful representation as a

fundamental qualitative characteristic of useful financial information.

Required:
Explain why faithful representation is important. (5 marks)

b) Comparability is one of the enhancing qualitative characteristics of useful financial

information. Comparability improves usefulness of financial statements and it is achieved
by consistency.

Required:
Explain the role of consistency in relation to changes in accounting policy and the need for
comparability. (5 marks)

c) Lana Ltd is a public listed company in Ghana. The company is located in the Northern
Region of Ghana. The company operates in the manufacturing sector of Ghana. The
company prepares its accounts to 31 December each year.

During the year ended 31 December 2021, Lana Ltd built a head office. The costs
associated with the construction of the head office are as follows:
GH¢ million
Fees for environmental certifications and building permits 0.5
Leasehold Land acquisition 10
Architect and engineer fees 1.0
Construction material and labour costs (including unused materials) 6.5
18.0

At 31 October 2021, the date when the head office extension became available for use, the
cost of unused materials on site amounted to GH¢0.5 million. At that date, the total
borrowing costs incurred on a loan which was used to specifically finance the head office
extension amounted to GH¢0.8 million. The estimated useful life of the building was 40
years.

Required:
With reference to IFRSs, determine the initial cost to be capitalised, the depreciation charge
for the yearend 31 December 2021 and the carrying amount as at 31 December 2021.
(5 marks)

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d) IFRS 3: Business Combinations defines fair value consistently with IFRS 13: Fair Value
Measurement. IFRS 3 requires the acquiree’s assets and liabilities to be incorporated into
the consolidated financial statements at their fair values rather than at their carrying
amounts.

Required:
i) Explain the meaning of fair value in accordance with IFRS 13. (2 marks)
ii) Explain the reasons why acquiree’s assets and liabilities are measured and recognised at
their fair value within the consolidated financial statements. (3 marks)

(Total: 20 marks)

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SUGGESTED SOLUTION

QUESTION ONE
Panin Group
Consolidated statement of financial position as at 31 December 2021
GH¢
million
Assets:
Property, plant & equipment (229.5+162Wk2–1.9Wk5) 389.6
Brand 8
Investment in associate (Wk6) 34.54
432.14
Current assets (80.5+64–0.24Wk2–1interco rec+0.4div rec.) 143.66
Total assets 575.80

Equity and liabilities

Share capital 52.8
Revaluation reserves (Wk5) 11.03
Retained earnings (Wk5) 357.95
Total equity attributable to shareholders of parent 421.78
Non-controlling interest (Wk4) 18.92
Total equity 440.70
Current liabilities (95.2+44.5–3.6interco. div–1interco pay) 135.10
Total equity and liabilities 575.80

Workings (except Wk1 all workings in GH¢ million):

Wk1 Group structure
Panin

27 x 100 = 90% 5x100 = 25%

30 NCI=10% 20

Kakra Tawia
(1 year sub.) (6 months ass.)
Wk2 Net assets schedule
Acq. date Rep. date Post-acq
Kakra
Share capital 30 30 -
Revaluation reserves 5.5 6.5 1
Retained earnings 72 145 73
Brand 11 8 (3)
Unrealised profit
On sale to Panin (20% x 1.2) - (0.24) (0.24)

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 On sale to Tawia (25% x 1.5 x 25%) - (0.09) (0.09)
118.5 189.17 70.67

Wk3 Goodwill – Kakra

Cost of investment 96
Less: Kakra’s % of net assets at acquisition (90% x 118.5) (106.65)
Bargaining gain on purchase (10.65)

Alternatively
Cost of investment 96
NCI’% of net assets at acquisition (10% x 118.5) 11.85
Less: Net assets at acquisition (118.5)
Bargaining gain on purchase (10.65)

Wk4 Non-controlling interests

NCI’s % of net assets at reporting (10% x 189.17) 18.92

Alternatively
At acquisition (Wk3) 11.85
Less: NCI’s % of post-acquisition (10% x 70.67) 7.07
To CSFP 18.92

Wk5 Reserves
Retained earnings
Panin
Balance b/d 274
Non-financial consideration (96 – 90) 6
Machine transfer (see below) (1.9)
Post-acquisition dividend
Kakra: (90% x 4) 3.6
Tawia (25% x 1.6) 0.4
282.1
Kakra
Parent’s % of post-acquisition earnings (90% x (70.67 – 62.70
1)Wk2)
Bargaining gain 10.65

Tawia
Parent’s % of post-acquisition earnings (25% x 10) 2.5
To CSFP 357.95

Machine transfer
Carrying amount with transfer (8 – (8 x 20%)) 6.4
Carrying amount without transfer (6 – (6x1/4)) 4.5
Overstated amount 1.9

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 Revaluation reserves
Panin: Balance b/d
Kakra: Parent’s % of post-acquisition (90% x 1Wk2) 10
Tawia: Parent’s % of post-acquisition (25% x 0.5) 0.9
To CSFP 0.13
11.03

Wk6 Investment in associate

Cost of investment 32
Add: Parent’s % of profit (Wk5) 2.5
Add: Parent’s % of revaluation (Wk5) 0.13
Less: Unrealised profit (Wk5) (0.09)
To CSFP 34.54

(Total: 20 marks)

QUESTION TWO

a) IFRS 15 requires revenue to be recognised as each performance obligation is

fulfilled. An entity satisfies a performance obligation by transferring control of a
promised good or service to the customer, which could occur over time or at a
point in time.

In this arrangement, Anto Ltd has delivered the machines and transferred control
to the customer but the entity cannot recognise revenue. This is because the
existence of the right of return and the lack of relevant historical evidence means
that the Anto Ltd cannot conclude that it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will not occur in
accordance with paragraphs 56–58 of IFRS 15. Consequently, revenue is recognised
after three months (i.e. on 31 March 2022) when the right of return lapses.

The contract includes a significant financing component, in accordance with

paragraphs 60–62 of IFRS 15 as Abeiku Dealer has to wait for two years before
receiving the payment. The credit advanced would attract annual interest of 20%.

The following journal entries illustrate how the entity accounts for this contract:
 When the product is transferred to the customer
GH¢000 GH¢000
Asset for right to recover product to be returned 4,500
Inventory 4,500

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 During the three-month right of return period, no interest is recognised in
accordance with paragraph 65 of IFRS 15 because no contract asset or receivable
has been recognised
 When the right of return lapses (the product is not returned):
GH¢000 GH¢000
Receivable (7600/1.2 )2 5,278
Inventory 5,278
Cost of sales 4,500
Asset for right to recover product to be returned 4,500

Note: Interest charges will start from next financial year.

(7 marks)

b) Nkonya
Statement of profit or loss (extract) for the year ended 31 December 2021
GH¢000
Depreciation expense (100)
Impairment charge (1,370+130) (1,500)

Nkonya
Statement of financial position (extract) as at 31 December 2021
GH¢000
Current assets
Held for sale 6,800

Workings
GH¢000
Carrying amount @ 1 Jan 2021 8,400
Less: 3 months dep (10,000/25 x 3/12) (100)
Carrying amount @ reclassification 8,300
Impairment charge (1,370)
Fair value less cost to sell (7 – (1% x 7)) 6,930
Additional charge (130)
Revised carrying amount @ 31 Dec 2021 6,800

Note: the eventual sale of the property constitutes an adjusting event. Held for sale
is not subject to depreciation.
(7 marks)

c)
Carrying Tax base Taxable/ Deferred
amount (deductible) tax
Temporary @ 30%
difference
GH¢000 GH¢000 GH¢000 GH¢000
Property, plant and equipment 95,000 72,000 23,000 6,900
Provision for contamination (11,000) - (11,000) (3,300)

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 Inventory 24,000 27,000 (3,000) (900)
Development 12,000 - 12,000 3.600
Total 120,000 99,000 21,000 6.300

Deferred tax liability (net) is GH¢6.3 million.

(6 marks)

(Total: 20 marks)

QUESTION THREE

Kinbuka Ltd
Statement of profit or loss for the year ended 31st December 2021
GH¢
Revenue 1,171,000
Cost of sales (W7) (592,100)
Gross profit 578,900
Other income (W1) 4,000
Administrative expenses (W8) (181,600)
Marketing & distribution expenses (55,000)
Profit before interest and tax 346,300
Finance income (W11) 2,910
Profit before tax 349,210
Tax expense (W3) (46,850)
Profit for the year 302,360
Other comprehensive Income:
FVOCI changes (W11) 1,290
Total Comprehensive income 303,650

Kinbuka Ltd
Statement of financial position as at 31st December 2021
GH¢ GH¢
Non-current assets:
Property, plant & equipment (W10) 99,500
Financial asset (W11) 21,000
Intangible assets (W10) 39,000
159,500
Current assets
Inventory 65,000
Trade receivables (W12) 231,000
Bank (W13) 281,000 577,000
Total assets 736,500

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 Equity & Liabilities:
Equity:
Share capital 200,000
Retained earnings (W14) 370,360
FVOCI reserve(W11) 1,290
571,650
Non-current liabilities:
Deferred tax liability (W5) 24,750

Current tax liabilities

Trade payables 125,000
Current tax liability(W4) 15,100 140,100
Total Equity & Liabilities 736,500

Workings:
1. Gain or loss on derecognition of non-current asset
Date of accident is 1 November 2021, and the motor vehicle on this date became
damaged beyond repairs. Thus, the asset is derecognised on this date. Since, the
asset is insured, insurance claim receivable becomes the benefit to be derived upon
derecognition. This was however, not known at this date, and became known after
the year end. In accordance IAS 10, Events after the Balance sheet date, the payment
of the claim by the Insurance company is an adjusting event, and hence should be
used in determining gain or loss upon derecognition of the asset.
Acquisition date of asset = 1 January 2019
Depreciation = 10/100 x GH¢95,000 = GH¢9500
Accumulated depreciation = 2years x GH¢9,500 = GH¢19,000

No depreciation is charged in the year of derecognition.

Carrying value at date of derecognition = GH¢95,000 – GH¢19,000 = GH¢76,000
The insurance claim as at the year-end had not been received, and it is recorded as
follows:
Debit Insurance claim receivable GH¢80,000
Credit Asset disposal/derecognition a/c GH¢80,000

The asset is derecognised by the carrying value of GH¢76,000 (i.e cost of GH¢95,000
and Accumulated depreciation of GH¢19,000).
Gain upon derecognition of GH¢4,000 (GH¢80,000 – GH¢76,000) is recognized in
the profit or loss account.

2. Under/(over)provision of tax
Year Current tax Audit tax Difference
GH¢ GH¢ GH¢
2019 45,000 43,000 (2,000 )
2020 57,800 67,600 9,800
7,800
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3. Tax expense Computation
GH¢
Current tax 35,300
Under-provision (W2) 7,800
Deferred tax 3,750
46,850

4. Current tax liability

GH¢
Current tax expense 35,300
Self-assessment tax (28,000)
Under-provision of tax 7,800
15,100

5. Deferred tax liability

GH¢
Balance b/f 21,000
P&L 3,750
24,750

6. Depreciation
GH¢
Furniture & fittings (20/100 x 88000) 17,600
Motor vehicles (10/100 x (180000-95000) 8,500
Office equipment (10/100 x 30000) 3,000
Intangible assets (10/100 x 50000) 5,000
34,100

7. Cost of sales
GH¢
Opening Inventory 80,000
Purchases 548,000
Closing inventory (65,000)
563,000
Depreciation (W6) 34,100
597,100

8. Administrative expenses
GH¢
Balance per trial balance 180,000
Brokerage fee (400)
Bank charges 2,000
181,600

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9. Bank charges
GH¢
Cash book balance 283,000
Unpresented cheques 72,000
355,000
Bank balance 353,000
2,000
10. Property, Plant & Equipment
GH¢
Furniture & fittings (88000-18000-17600) 52,400
Motor vehicles (180000-62400)-76000-8500) 33,100
Office equipment (30000-13000-3000) 14,000
99,500
Intangible assets (50000-6000-5000) 39,000

11. Financial Asset

The financial asset is a debt instrument, and the business model of the company
concerning this investment is to hold the bond till maturity, but can also sell it
when there is a good price to do that. The bond is thus measured at fair value
through other comprehensive. The asset is initially recognized at the cost of
GH¢19,400 (19,000 + 400 (issue cost)). The total net finance income (brokerage fees,
interest income and the redemption premium) is amortised like asset measured at
amortised cost. However, at the year-end the asset is fair valued, and changes are
taken to other comprehensive income.
Opening Interest Coupon Balance Fair value FVOCI
Years balance @15% Received at end at year end reserve
GH¢ GH¢ GH¢ GH¢ GH¢ GH¢
2021 19,400 2,910 (2,600) 19,710 21,000 1,290

12. Trade & Other receivables

GH¢
Balance per Trial balance 151,000
Insurance claim receivable 80,000
231,000
13. Bank Balance
GH¢
Balance per Trial balance 283,000
Bank charges (2,000 )
281,000
14. Retained earnings
GH¢
Balance b/f 68,000
Profit for the year 302,360
370,360
(100 ticks in all @0.20 per tick = 20 marks)

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QUESTION FOUR

Boomu Ltd and Sintim Ltd

Memorandum

To: The Board of Directors

From: The Finance Manager
Date: 3rd April 2022
Subject: Analysis of the performance of the performance of Boomu Ltd
The performance of Boomu Ltd for the year ended 30 June 2022 has been assessed
in this report. The performance of Sintim, a competitor, is used as the benchmark
in assessing the performance of the company for the year ended 30 June 2022. The
attached appendix has the figures or computations underlying the report.
Reference should therefore be made to it for better appreciation of the figures used
or emphasized. The company’s performance assessment has been made on the
bases: profitability, working capital management and gearing.

Profitability
The revenue of the company for the year to 30 June 2022 was lower by that of the
competitor by 35.26%. However, profit generated for all investors by the company
was higher than the competitor’s. Whereas the company recorded profit of 34.61%
on its investment, the competitor generated returns of 34.36% for its investors. In
addition, the earnings generated for only ordinary shareholders after taking into
consideration finance cost and tax expense is 28.90% for the company but 25.78%
for Sintim Ltd. The trading performance of the company as measured by the gross
profit margin is higher than the competitor’s. This represents a better performance
of the company in controlling its cost of sales than the competitor.

Working capital management

The liquidity of the company is assessed using the current ratio and the acid-test
ratio. The current ratio indicates a value of 2.53 times, which is higher than Sintim
Ltd.’s ratio of 2.34 times. The company thus has a stronger liquidity position than
the competitor. This is further corroborated by the acid-test ratio which shows a
higher ratio of 1.97 times compared to 1.29 times, suggesting that upon excluding
even inventory, the remaining assets of Boomu Ltd is able to cover more of its
current liabilities than what Sintim Ltd.’s remaining assets can cover for its
liabilities.

On inventory management, the inventory turnover is employed in assessing the

performance of the two companies. The computed ratios, as can be referred from
the appendix, are 29 days and 18 days for Boomu Ltd and Sintim Ltd respectively.
The company’s performance trails the competitor’s in inventory management, as
Sintim Ltd is able to use fewer days in getting its inventories sold.

Analysis of the receivable collection period of the two companies also reveals that
Boomu Ltd takes 15 days in collection of its receivables, whiles Sintim Ltd uses

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 only 1 day to collect its receivables. The company’s performance trails that of the
competitor in this regard.
On creditors’ management, the trade payables settlement period for Boomu Ltd is
higher than the competitor’s. This suggests that suppliers of the company give
longer time for payment of credit purchases than what the competitors receive
from their suppliers. The company’s performance on trade payables management
is therefore better than the competitor’s because of the increased in spontaneous
finance derived from the longer credit days given by its suppliers.

Gearing
The company is an equity-financed company and therefore shareholders do not
have any financial risk. The competitor, Sintim Ltd, however, has debt in its capital
structure. Sintim Ltd.’s shareholders face financial risk but Boomu Ltd’
shareholders have no financial risk.

Conclusion
The company performed better than the competitor in terms of profitability and
liquidity. The management of trade payables of the company is also better than the
competitor’s. However, trade receivables and inventory management of the
company trails the performance of the competitor.

Appendix
RATIOS FORMULA Boomu Ltd Sintim Ltd
Profitability:
Return on capital 𝑃𝐵𝐼𝑇 142,085 118,130
= 𝑥 100 𝑥100 𝑥100
employed 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 410,536 343,820

=34.61% =34.36 %
Return on Equity 𝑃𝐴𝑇 118,625 80,910
= 𝑥 100 𝑥100 𝑥100
𝐸𝑞𝑢𝑖𝑡𝑦 410,536 313,820

= 28.90% =25.78%
Gross profit 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 194,385 193,900
= 𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 619,085 956,200

=31.40% =20.28%

Liquidity
Current ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 151,504 83,788
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 59,804 35,832

=2.53 times =2.34 times

Acid-test ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 151,504 − 33,960 83,788 − 37,480
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 59,804 35,832

= 1.97 times =1.29 times

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Efficiency
Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 33,960 37,480
= 𝑥365 𝑥365 𝑥365
turnover (days) 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 424,700 762,400

=29 days =18 days

Trade receivables 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 26,216 3,836
= 𝑥365 𝑥365 𝑥365
collection (days) 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 619,085 956,200

=15 days =1 day

Trade payables 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 42,904 28,040
= 𝑥365 𝑥365 𝑥365
settlement period 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 424,700 762,400

=37days =13 days

Gearing:
Interest cover 𝑃𝐵𝐼𝑇 118,130
ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑛𝑜𝑡 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑏𝑙𝑒 3,000
=39.38 times

Debt-to-equity 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 0 30,000

ratio (%) 𝐸𝑞𝑢𝑖𝑡𝑦 410,536 313,820

=0% =9.56%

(1/4 mark for each correct computation of ratio = 5 marks; 15 marks for the report)
(Total = 20 marks)

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QUESTION FIVE

a) The Conceptual Framework for Financial Reporting implies that the two
fundamental qualitative characteristics (relevance and faithful representation) are
vital as, without them, financial statements would not be useful, in fact they may
be misleading. As the name suggests, the four enhancing qualitative
characteristics (comparability, verifiability, timeliness and understandability)
improve the usefulness of the financial information.

Therefore, financial information which is not relevant or does not give a faithful
representation is not useful (and worse, it may possibly be misleading); however,
financial information which does not possess the enhancing characteristics can
still be useful, but not as useful as if it did possess them. In order for financial
statements to be useful to users (such as investors or loan providers), they must
present financial information faithfully, i.e., financial information must faithfully
represent the economic phenomena which it purports to represent (e.g., in some
cases it may be necessary to treat a sale and repurchase agreement as an in-
substance (secured) loan rather than as a sale and subsequent repurchase).

Faithfully represented information should be complete, neutral and free from

error. Substance is not identified as a separate characteristic because the IASB says
it is implied in faithful representation such that faithful representation is only
possible if transactions and economic phenomena are accounted for according to
their substance and economic reality.
(5 marks)

b) The main objective of financial statements is to provide information that is useful

to a wide range of users for the purpose of making economic decisions. Therefore,
it is important that the activities and events of the entity, as expressed within the
financial statements, are understood by users, meaning that their usefulness and
relevance is maximised. This can present management with a problem because
clearly not all users have the same (financial) abilities and knowledge. For
understandability, management are allowed to assume users do have a reasonable
knowledge of accounting and business and are prepared to study the financial
statements diligently. Importantly, this characteristic cannot be used by
management to avoid disclosing complex information that may be relevant in user
decision-making.

However, management must recognise that too much or overly complex

disclosure can obscure the more important aspects of an entity’s performance, i.e.,
important information should not be ‘buried’ in the detail of unfathomable
information. Comparability is the main tool by which users can assess the
performance of an entity. This can be done through trend analysis of the same
entity’s financial statements over time (say five years), or by comparing one entity
with other (suitable) entities (or business sector averages) for the same time
period. This means that the measurement and disclosure (classification) of like

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 transactions should be consistent over time for the same entity, and (ideally)
between different entities. Consistency and comparability are facilitated by the
existence and disclosure of accounting policies.

The above illustrates the close correlation between comparability and consistency.
However, it is not always possible for an entity to apply the same accounting
policies every year; sometimes they have to change (e.g., because of a new
accounting standard or a change in legislation). Similarly, it is not practical for
accounting standards to require all entities to adopt the same accounting policies.
Thus, if an entity does change an accounting policy, this breaks the principle of
consistency. In such circumstances, IFRSs normally require that any reported
comparatives (previous year’s financial statements) are restated as if the new
policy had been in force when those statements were originally reported. In this
way, although there has been a change of policy, comparability has been
maintained.

It is more difficult to address the issue of consistency across entities; as already

stated, accounting standards cannot prescribe the use of the same policy for all
entities (this would be uniformity). However, accounting standards do prohibit
certain accounting treatments (considered inappropriate or inferior) and they do
require entities to disclose their accounting policies, such that users become aware
of differences between entities, and this may allow them to make value
adjustments when comparing entities using different policies.
(5 marks)

c) Lana Ltd
GH¢ million
Leasehold land acquisition 10
Fees for environmental certifications and building permits 0.5
Architect and engineer fees 1
Construction material and labour costs 6.5
Unused material (0.5)
Borrowing costs 0.8
Initial cost to be capitalized 18.3
Depreciation (18.3/40 x 2/12) (0.08)
Carrying amount at 31 December 2021 18.22
(5 marks)

d)
i) IFRS 13 Fair Value Measurement defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
In order to account for an acquisition, the acquiring company must measure the
cost of what it is accounting for, which will normally represent:
 The cost of the investment in its own statement of financial position

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 The amount to be allocated between the identifiable net assets of the subsidiary,
the non-controlling interest and goodwill in the consolidated financial statements.
(2 marks)

ii) The subsidiary’s identifiable assets and liabilities are included in the consolidated
accounts at their fair values for the following reasons:
 Identifiable assets and liabilities recognised in the accounts are those of the
acquired entity that existed at the date of acquisition. Assets and liabilities are
measured at fair values reflecting conditions at the date of acquisition. The
following do not affect fair values at the date of acquisition and are therefore dealt
with as post-acquisition items.
 Consolidated accounts are prepared from the perspective of the group, rather than
from the perspectives of the individual companies. The book values of the
subsidiary’s assets and liabilities are largely irrelevant, because the consolidated
accounts must reflect their cost to the group (i.e. to the parent), not their original
cost to the subsidiary. The cost to the group is their fair value at the date of
acquisition.
 Purchased goodwill is the difference between the value of an acquired entity and
the aggregate of the fair values of that entity’s identifiable assets and liabilities. If
fair values are not used, the value of goodwill will be meaningless.
(3 marks)

(Total: 20 marks)

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