SKILLS LEVEL EXAMINATION

2019

Mock Exam

(3 hours)

Financial reporting

Answers

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Financial reporting

1 Barry
(a) Statement of profit or loss for the year ended 31st August 20X1
₦000
Revenue 30,000
Cost of sales (w1) (19,650)
––––––
Gross profit 10,350
Distribution costs (w1) (1,370)
Administrative expenses (w1) (1,930)
––––––
Profit from operations 7,050
Finance costs (350)
––––––
Profit before tax 6,700
Tax (w2) (2,500)
––––––
Profit after tax 4,200
––––––
(b) Statement of financial position as at 31st August 20X1
₦000 ₦000
Assets
Non-current assets
Property, plant and equipment 39,600
Current assets
Inventory 4,600
Trade and other receivables (7,400 + 200) 7,600
Cash and cash equivalents 700
12,900
–––––––
Total assets 52,500
–––––––
Equity and liabilities
Capital and reserves
Equity shares 21,000
Share premium 2,000
Revaluation reserve 4,700
Accumulated profits 11,800
–––––––
Total equity 39,500
Non-current liabilities
Borrowings 5,200
Current liabilities
Trade and other payables 5,300
Taxation (2,100 + 400) 2,500
7,800
–––––––
Total equity and liabilities 52,500
–––––––

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(c) Statement of changes in equity for the year ended 31st August 20X1
Share Share Revaluation Retained
capital premium reserve profits Total
₦000 ₦000 ₦000 ₦000 ₦000
Balance at
beginning of year 21,000 2,000 0 7,500 30,500
Dividends paid (200) (200)
Profit for the period 4,200 4,200
Other
comprehensive
income:
Revaluation of
non current assets 5,000 5,000
Transfer of excess
depreciation on
revaluation (300) 300 0
––––––– ––––––– ––––––– ––––––– ––––––
Balance at end of
year 21,000 2,000 4,700 11,800 39,500
––––––– ––––––– ––––––– ––––––– ––––––
(d) Reconciliation of opening and closing property, plant and equipment
Plant & Fixtures & Assets under
Land Buildings machinery fittings construction Total
₦000 ₦000 ₦000 ₦000 ₦000 ₦000
Cost/ Valuation
At 1 Sept 20X0 10,000 9,000 20,100 10,000 400 49,500
Additions - - - - 50 50
Reclassification - - 450 - (450) -
Revaluation 1,000 1,000 - - - 2,000
–––––– –––––– –––––– –––––– –––––– ––––––
At 31 Aug 20X1 11,000 10,000 20,550 10,000 - 51,550
–––––– –––––– –––––– –––––– –––––– ––––––
Depreciation
At 1 Sept 20X0 - 3,000 4,000 3,700 - 10,700
Revaluation - (3,000) - - - (3,000)
Charge for year - 1,000 2,550 700 - 4,250
–––––– –––––– –––––– –––––– –––––– ––––––
At 31 Aug 20X1 - 1,000 6,550 4,400 - 11,950
–––––– –––––– –––––– –––––– –––––– ––––––
Net book value
At 31 Aug 20X1 11,000 9,000 14,000 5,600 - 39,600
At 1 Sept 20X0 10,000 6,000 16,100 6,300 400 38,800
–––––– –––––– –––––– –––––– –––––– ––––––

(e) Private sector and public sector

The private sector is the part of a nation’s economy which is owned and
controlled by private individuals or organisations. Private sector
organisations include limited companies, partnerships and sole traders.
The public sector is the part of a nation’s economy which is under the
control of government. Public sector entities include national governments,
regional governments (for example, state, provincial, territorial), local
governments (for example, city, town) and their component entities (for
example, departments, agencies).

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Financial reporting

The purpose of financial reporting is to provide information useful to users.

The objectives of financial reporting are therefore determined by reference
to the users and their information needs.
Private sector
The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity.
Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of credit.
Users are interested in the assets and liabilities of the entity and how the
net assets are used to generate profit and cash flow.
Public sector
Public sector entities exist to provide a service rather than to make a profit.
They raise money from citizens (through taxes and fees) and from lenders
in order to be able to provide the services.
Public sector entities are accountable for the management and use of
resources to those that provide the resources and those that depend on the
delivery of necessary services.
The objectives of financial reporting by public sector entities are to provide
information about the entity that is useful to users for accountability
purposes and for decision-making purposes
Given that the primary objective of most public sector entities is to deliver
services rather than to make profits, the performance of such entities can
be only partially evaluated by examination of financial position, financial
performance and cash flows.
Some information that might be of key interest to users of financial
statements of public sector entities cannot be provided by financial
statements. However, although financial statements cannot fulfil all of the
users’ information needs, they still provide useful information that allows
users to judge:
 whether resources have been acquired economically and used
efficiently and effectively to achieve its service delivery objectives;
 how management has discharged its responsibilities for safekeeping
and managing resources of the entity; and
 the extent to which the resources are available to support future
service delivery.
Having said that there are certain intrinsic limitations that might prevent
financial statements drafted according to IFRS as providing a full picture of
financial position and performance of public sector bodies;
 Non-exchange transactions are a large feature of public sector
activity. In a non-exchange transaction one party receives value from
another without directly giving approximately equal value in
exchange.
 The level and quality of services received by an individual is not
normally directly related to the level of taxes assess.

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 Financial statements do not readily provide information that enables

users to understand the scope and impact of non-exchange
transactions.
 Commitments arising from public sector programmes do not meet the
definition of a liability and are not recognised in financial statements.
 The power to raise taxation does not meet the definition of an asset
and is not recognised in the financial statements.
 Assets are held for their service potential rather than the reporting to
generate cash flows. This makes it difficult to arrive at a relevant
measure of value of such assets.
Workings
1 Allocation of expenses
Cost Admin Distrib
of
sales
₦000 ₦000 ₦000
Raw materials consumed 9,500
Manufacturing overheads 5,000
Increase in inventories (1,400)
Staff costs (70%/20%/10%) 3,290 940 470
Distribution costs 900
Depreciation
Building (50%/50%) 500 500
Plant and machinery 2,550
Fixtures and fittings (30%/70%) 210 490
–––––– –––––– ––––––
19,650 1,930 1,370
–––––– –––––– ––––––
2 Accumulated profits brought forward
₦000 ₦000
Accumulated profits carried forward per question 14,000
Less tax charge
- Current year estimate 2,100
- Underprovision in previous year 400
––––– (2,500)
Add transfer of excess depreciation on revalued
building 300
––––––
11,800
––––––

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Financial reporting

2 Brooklyn
1 Development expenditure
IAS 38 on intangibles requires that research and development be
considered separately:
research – which must be expensed as incurred
development – which must be capitalised where certain criteria are met.
It must first be clarified how much of the ₦3 million incurred to date (10
months at ₦300,000) is simply research and how much is development.
The development element will only be capitalised where the IAS 38 criteria
are met. The criteria are listed below together with the extent to which they
appear to be met.
 The project must be believed to be technically feasible. This appears
to be so as the feasibility has been acknowledged.
 There must be an intention to complete and use/sell the intangible.
Completion is scheduled for June 20X6
 The entity must be able to use or sell the intangible. Interest has been
expressed in purchasing the know-how on completion
 It must be considered that the asset will generate probable future
benefits. Confirmation is required from Brooklyn as to the extent of
interest shown by the pharmaceutical companies and whether this is
of a sufficient level to generate orders and to cover the deferred
costs.
 Availability of adequate financial and technical resources must exist
to complete the project. The financial position of Brooklyn must be
investigated. A grant is being obtained to fund further work and the
terms of the grant, together with any conditions, must be discussed
further.
 Able to identify and measure the expenditure incurred. A separate
nominal ledger account has been set up to track the expenditure.
If all of the above criteria are met, then the development element of the
₦3m incurred to date must be capitalised as an intangible asset.
Amortisation will not begin until commercial production commences.
2 Non-current asset held for sale
IFRS 5 on non-current assets held for sale and discontinued operations
requires that where a non-current asset is being held for sale, rather than
for continued use in the business, it must be re-classified in the statement
of financial position, re-measured and depreciation must cease to be
charged.
For the asset to be classified as “held for sale” it must be available for
immediate sale in its present condition and the sale must be highly
probable. This requires that:
The appropriate level of management are committed to the plan
An active programme is underway to locate a buyer
The asset is being marketed at a realistic price
Completion of the sale is anticipated within one year of classification.

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 Mock examination: Answers

From the information provided, an agent has been instructed by the plant
manager, which suggests that the organisation is committed to the plan to
sell the asset. Confirmation is required that the price of ₦175,000 is
realistic. The asset has been out of use now for 9 months and this may
suggest that the target price is too high and that a sale may not be
achieved within the year.
If reassurance as to the above conditions can be obtained, the asset must
be reclassified in the statement of financial position as “Non-current assets
held for sale”, positioned under current assets. It should be re-measured to
₦168,000 being the lower of carrying amount (₦170,000 see below) and
fair value less costs to sell (₦175,000 x 96%). The write down of ₦2,000
should be charged to the profit or loss for the year. Depreciation should
cease from the date of classification.
Workings
The fair value less cost to sell is ₦175,000 – 4% agents fees = ₦168,000
Carrying value is:
Cost ₦260,000
Residual value ₦ 60,000
––––––––
Depreciable amount ₦200,000
Useful life 5 years
Annual depreciation ₦40,000
The current carrying value of ₦140,000 shows that the asset has received
three years of depreciation by the 30th June 20X5. If classified as held for
sale, depreciation should have ceased on 30th September 20X5 and 3
months of depreciation should be added back, giving a revised carrying
value of ₦170,000.
3 Provision
Although the claim was made after the reporting period, IAS 10 considers
this to be an adjusting event after the reporting period. The employment of
the individual dates back to 20X2 and so the lawsuit constitutes a current
obligation for the payment of damages as a result of this past event (the
employment).
The amount and the timing are not precisely known but the likelihood of
payment of damages by Brooklyn is probable and so a provision should be
made for the estimated amount of the liability, as advised by the lawyer.
Disclosure, rather than provision, would only be appropriate if the expected
settlement was possible or remote, and the lawyer’s view is that a payment
is more likely than not.
It is not appropriate to calculate an expected value where there is only one
event, instead a provision should be made for the most likely outcome. The
lawyer has various views on the possible payout, but the most likely payout
is ₦500,000 as this has a 50% probability. As settlement of the provision is
not anticipated until 20X8, the provision should be discounted back at 8%
to give a liability of ₦476,280.
Provided that the payment from the insurance company is virtually certain,
this should be shown as an asset, also at its discounted value of ₦47,628,
being 10% of the provision.
In both cases the discounting should be unwound over the coming three
years through profit or loss.

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Financial reporting

4 Revaluation
IAS 16 on Property, Plant and Equipment does not impose a frequency for
updating revaluations. It simply requires a revaluation where it is believed
that the fair value of the asset has materially changed. Hence, if in the past
there have been material differences between the carrying amount and fair
value at the 5 yearly review then Brooklyn should consider having more
frequent valuations following on from this year’s valuation.
Revaluations should be regular and not timed simply when property prices
are at a peak. It is not acceptable for Brooklyn to defer its next revaluation
while values are low. If property prices do fall in 20X6, then it may be
necessary to perform an impairment test in accordance with IAS 36
Impairment of assets.
If it is believed that an asset value has moved materially, then all assets in
that class must be revalued. Hence it is not sufficient for Brooklyn to just
revalue the London property.
IAS 16 does not require the valuation to be performed by an external party,
and so the use of the property manager to conduct the valuations is
acceptable. Notes to the financial statements will disclose that he is not
independent of the company.

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 Mock examination: Answers

3 Mbanefo Ltd
Mbanefo Ltd – Statement of profit or loss extracts year ended 31 March
20X8
₦
Loss on disposal of plant – see note below
18,000
((90,000 – 60,000) – 12,000)
Depreciation for year (wkg (i)) 75,000
Government grants (a credit item) – see note below and
(19,000)
(wkg (iv))
Note: the repayment of government grant of ₦3,000 may instead have been
included as an increase of the loss on disposal of the plant.
Mbanefo Ltd – Statement of financial position extracts as at 31 March 20X8
Cost Accumulated Carrying
depreciation amount
₦ ₦ ₦
Property, plant and equipment
(wkg (v)) 360,000 195,000 165,000
––––––– –––––––– –––––––
Non-current liabilities
Government grants (working (iv)) 39,000
Current liabilities
Government grants (working (iv)) 27,000
Workings
(i) Depreciation for year ended 31 March 20X8 ₦
On acquired plant (working (ii)) 52,500
Other plant (working (iii)) 22,500
–––––––
75,000
–––––––

(ii) The cost of the acquired plant is recorded at ₦210,000 being its base
cost plus the costs of modification and transport and installation. Annual
depreciation over three years will be ₦70,000. Time apportioned for year
ended 31 March 20X8 by 9/12 = ₦52,500.

(iii) The other remaining plant is depreciated at 15% on cost ₦

(b/f 240,000 – 90,000 (disposed of) x 15%) 22,500

(iv) Government grants

Transferred to income for the year ended 31 March 20X8: ₦
From current liability in 20X7 (10,000 – 3,000 (repaid)) 7,000
From acquired plant (see below): 12,000
–––––––
19,000
–––––––
Non-current liability
b/f 30,000
transferred to current (11,000)
on acquired plant (see below) 20,000
–––––––
39,000
–––––––

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Financial reporting

Grant on acquired plant is 25% of base cost only = ₦48,000

This will be treated as: ₦
To income in year ended 31 March 20X8 (48,000/3 x 9/12) 12,000
Classified as current liability (48,000/3) 16,000
Classified as a non-current liability (balance) 20,000
–––––––
48,000
–––––––
Note: government grants are accounted for from the date they are
receivable (i.e. when the qualifying conditions for the grant have been met).
Current liability
Transferred from non-current (per question) 11,000
On acquired plant (see above) 16,000
–––––––
27,000
–––––––
(v)
Accumulated Carrying
Cost depreciation amount
₦ ₦ ₦
Property, plant and equipment
Balances b/f 240,000 180,000 60,000
Disposal (90,000) (60,000) (30,000)
Addition (w (ii)) 210,000 52,500 157,500
Other plant depreciation for year (wkg (iii)) 22,500 (22,500)
––––––– –––––––– –––––––
Balances at 31 March 20X8 360,000 195,000 165,000
––––––– –––––––– –––––––

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 Mock examination: Answers

4 Chris and Caroline

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Financial reporting

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Commentary

Profitability

The return on capital employed achieved by Chris (28.5%) is substantially lower

than that achieved by Caroline (47%). This variation in performance is also seen
at the gross profit (60% compared to 70%) and net profit levels (30% compared
to 39%).

The variation in gross profit percentage could be caused by differences in sales

mix, inventory valuation methods or mark-up.

Since these entities operate in the same sector it is unlikely that their selling
prices differ significantly. However, Caroline, as a much larger entity, may be able
to negotiate better prices from its suppliers.

Caroline is also more efficient at using its assets. It is generating 85c per ₦1 of
assets whereby Chris is only generating 70c per ₦1.

Efficiency/liquidity

The liquidity of both entities appears satisfactory, although Caroline has less
funds tied up in its current assets. Caroline is also more efficient at collecting its
debts (55 days compared to Chris’s 91 days), and takes a longer credit period
from its suppliers.

Solvency

Caroline is much more highly geared than Chris (44% compared to 4.8%).
Caroline has the ability to raise debt more easily because of its greater
profitability and its property, on which debt can be secured. Both companies can
easily cover their interest payments suggesting that neither entity’s debt is at risk.

Conclusion

Caroline is the stronger entity.

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Financial reporting

5 Kalejaiye Ltd
(a) (i) The depreciable amount of an intangible asset with a finite useful life
shall be allocated on a systematic basis over its useful life.
(ii) Amortisation shall begin when the asset is available for use
(iii) Amortisation shall cease at the earlier of the date that the asset is
classified as held for sale and the date that the asset is
derecognised.
(iv) The amortisation method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the
entity.
(v) The amortisation charge for each period shall be recognised in
statement of comprehensive income.

(b) Goodwill Account

₦ ₦
Goodwill recognised Impairment of
1-Jan-X8 (W1) 270,000,000 31-Dec-X8 goodwill 50,000,000
31-Dec-X8 Balance b/d 220,000,000

270,000,000 270,000,000
1-Jan-X9 Balance b/d 220,000,000
31-Dec-X9 Balance b/d 220,000,000

220,000,000 220,000,000

Brand
₦ ₦
1-Jan-X8 Brand recognised 100,000,000 31-Dec-X8 Amortisation 10,000,000
31-Dec-X8 Balance c/d 90,000,000

100,000,000 100,000,000

1-Jan-X9 Balance b/d 90,000,000 31-Dec-X9 Amortisation 10,000,000

Impairment of
31-Dec-X9 Brand 13,500,000
- 31-Dec-X9 Balance c/d 68,000,000

90,000,000 90,000,000

W1: Value of goodwill

₦000
Purchase price (50,000,000 x ₦30 x 90%) 1,350
Non-controlling interest
(10% (₦1,100,000,000 + ₦100,000,000)) 120
1,470
Less:
Fair value of net identifiable assets and liabilities (1,200)
Goodwill on acquisition 270

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(c) Fundamental principles

Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour

Threats to the fundamental principles

Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat

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Financial reporting

6 Handel
(a) Consolidated statement of financial position as at 30 September 20X9
₦ ₦
Assets
Non-current assets
Property, plant and equipment
(697,210 + 648,010) 1,345,220
Interest in associate (W6) 270,800
Goodwill 2,000
————–
1,618,020
Current assets
Inventory (495,165 + 388,619) 883,784
Receivables (385,717 + 320,540 + 6,000) 712,257
Cash at bank and in hand (101,274 + 95,010) 196,284
————–
1,792,325
————–
Total assets 3,410,345
————–

₦ ₦
Equity and liabilities
Capital and reserves
Share capital 600,000
Retained earnings (W5) 1,357,800
————–
1,957,800
Non-controlling interest 204,000

Non-current liabilities (400,000 + 150,000) 550,000

Current liabilities
Trade payables (375,366 + 252,179) (note 2) 627,545
Proposed dividends – parent company 65,000
– minority interest 6,000
————–
698,545
————–
Total equity and liabilities 3,410,345
————–
Workings
(1) Group structure

Handel

80% 40%

Schubert Albinoni

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(2) Net assets

Schubert
Balance Post
sheet
date Acquisition acquisition
₦ ₦ ₦ ₦ ₦
Share
capital 200,000 200,000

Retained
earnings 850,000 500,000
Proposed
dividend (30,000)
———– ———–
820,000 500,000 320,000
———––– ——–—–
1,020,000 700,000
———––– ———––

(3) Goodwill
Schubert
₦
Cost of shares 562,000
Share of net assets acquired (80%  700,000) (W2) (560,000)
————
2,000
———–
(4) Non-controlling interest
Share of net assets (20%  1,020,000) (W2) 204,000
————
(5) Retained earnings
₦
Handel 1,050,000
Dividends receivable – Schubert (80%  30,000) 24,000
– Albinoni (40%  15,000) 6,000
Proposed dividend (65,000)
————–
1,015,000
Schubert (80%  320,000 (W2)) 256,000
Albinoni (W6) 88,400
Unrealised profit (W7) (1,600)
————–
1,357,800
————–
(6) Investment in associate
₦000
Cost 184,000
Share of post-acquisition profit
(40%  [ (478 − 15) − 242) 88,400
Unrealised profit (W7) (1,600)
————–
270,800
————–

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Financial reporting

(7) Unrealised profit

₦
Step 1 – Unrealised profit
₦20,000 × 25/125 4,000

Step 2 – H’s share

₦4,000  40% 1,600

Step 3 – Double entry

Dr Retained earnings 1,600
Cr Investment in associate 1,600

(b) Bases of accounting

Accruals basis of accounting
Accruals basis accounting (accruals accounting, the accruals concept)
recognises transactions and other events and circumstances in the periods in
which those effects occur, even if the resulting cash receipts and payments occur
in a different period.
 Revenue from sales and other income should be reported in the period
when the income arises (which might not be the same as the period when
the cash is received).
 The cost of sales in the statement of comprehensive income must be
matched with the sales. Income and ‘matching’ expenses must be reported
in the same financial period.
 Other expenses should be charged in the period to which they relate, not
the period in which they are paid for.
Cash basis of accounting
Cash basis accounting recognises transactions in the periods in which cash
receipts and payments occur.
 Revenue from sales and other income would be reported in the period
when the cash is received (which might be in a later period than when the
income arose).
 Expenses are charged in the period to which they are paid not the period in
which they are incurred.
Over time the accruals based accounting and cash based accounting result in
recognising the same amounts. However, transactions might be recognised in
different periods under each system.

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