Financial Reporting · November 2021

(a) United Nigeria Limited (i) Statement of Comprehensive Income for the year ended December 31, 2020

Note N'000 Revenue 1 672,000 Cost of sales 2 (266,000) Gross profit 406,000 Other incomes discount received 8,000 Administrative expenses 3 (164,000) Distribution cost 4 (146,000) Operating profit 104,000 Finance cost 5 (10,000) Profit before taxation 94,000 Income tax expense (25,000) Profit for the year _69,000 United Nigeria Limited

(ii) Statement of changes in equity for the year ended December 31, 2020

Note Ordinary Share Retained Total Share Premium Earnings N'000 N'000 N'000 N'000 Balance b/f 150,000 90,000 252,000 492,000 Profit for the year

- - 69,000 69,000 Issues of shares 25,000 15,000 - 40,000 Dividend paid 6 - - 31,900 (31,900) 175,000 105,000 289,100 569,100 13 United Nigeria Limited

(iii) Statement of Financial Position as at December 31, 2020 Non-current assets: Note N'000 Property, plant & equipment 7 476,000 Current assets: Inventory 8 108,000 Trade receivables 9 306,000 Bank balance 10 168,100 Total current asset 582,100 Total assets 1,058,100 Equity and liabilities: Equity: Ordinary shares of N0.50 each 175,000 Share premium 105,000 Retained earnings 289,100 Total equity 569,100 Non-current liabilities 100,000 10% loan notes 120,000 12% preference shares 220,000 Current liabilities: Trade payables 234,000 Income tax payables 25,000 Interest payables 5,000 Payables for admin expenses 5,000 Total current liabilities 269,000 Total liabilities 48,000 Total equity and liabilities 1,058,100

Workings Wk 1: Revenue N'000 Balance as per the trial balance 680,000 Return inward (8,000) Balance to SOPL 672,000 WK 2: Cost of sales N'000 Opening Inventory 80,000 Purchases 300,000 Returns outwards (6,000) Closing inventory (108,000) Balance to SOPL 266,000 Wk 3: Administrative expenses N'000 Balance b/f 75,000 Depreciation on PPE 84,000 Accrued admin expenses 5,000 Balance to SOPL 164,000 14 N'000 Wk 4: Distribution Cost Discount allowed 10,000 Distribution expenses 80,000 Bad debt written-off 12,000 Increase in allowance for receivables 44,000 Balance to SOPL 146,000 Wk 4.1: Allowance for trade receivables N'000 Opening balance 10,000 Closing balance (15% x 360,000) 54,000 Increase in Allowance 44,000 Wk 5: Finance Cost N'000 Balance b/f 5,000 Accrued (100,000 x 10% x 6/12) 5,000 Balance to SOPL 10,000 Wk 6: Dividend paid N'000 Preference dividend 14,400 Ordinary dividend 17,500 31,900 Wk 7: Property, plant and equipment N'000 N'000 Cost b/f 950,000 Accumulated depreciation: Balance b/f 390,000 Current year 84,000 (474,000) Carrying Amount (SOPL) 476,000 Wk 8: Closing inventory N'000 N'000 Balance b/f 120,000 Less: Written down: Cost of damaged inventory 30,000 Net Realisable value 18,000 (12,000) Revised Closing inventory 108,000 Wk 9: Trade receivables N'000 Balance as per the trial balance 360,000 Allowance for trade receivables (54,000) Balance to SOFP 306,000 Wk 10: Bank balance N'000 Balance as per the trial balance 160,000 Proceeds from shares 40,000 Preference dividend paid (14,400) Ordinary dividend paid (17,500) Balance to SOFP 168,100 15

(b) Identification and accounting for impairment of assets under IAS 36 An entity must carry out an impairment review when there is evidence or an indication that impairment may have occurred. At the end of each reporting period, an entity should assess whether there is any indication that impairment might have occurred. If such an indication exists, the entity must estimate the recoverable amount of the asset, in order to establish whether impairment has occurred and if so, the amount of the impairment. The following are given by IAS 36 as possible indicators of impairment. These may be indicators outside the entity itself (external indicators), such as market factors and changes in the market. Alternatively, they may be internal indicators relating to the actual condition of the asset or the conditions of the entity’s business operations. If there is an indication that an asset (or cash-generating unit) is impaired then it is tested for impairment which involves the calculation of the recoverable amount of the item in question and comparing it with its carrying amount. Accounting On identifying the amount by which an asset is impaired, this amount will be charged to statement of profit or loss and the value of the affected non-current asset is also reduced by the same amount. That is-debit statement of profit or loss and credit non-current assets.

Examiner’s Report The question tests candidates’ knowledge of preparation of final accounts involving presentation of statement of comprehensive income, statement of changes in equity and statement of financial position as well as accounting for impairment of assets. Majority of the candidates attempted the question and performance was average. The commonest pitfall was the inability of the candidates to explain how entity should identify impairment of assets. Candidates are advised to pay more attention to all sections of the syllabus for better performance in future examinations. 16

Marking guide Marks Marks (a)i Preparation of statements of comprehensive income Pp Correct title of the statement ¼ Determination and presentation of revenue 1 Determination and presentation of cost of sales 2 Determination and presentation of admin expenses 1½ Determination and presentation of distribution cost 3 Determination and presentation of finance cost 1½ Determination and presentation of profit for the year 3/4 10 ii Preparation of statements of changes in equity

- Correct title of the statement ¼ Correctly stating components of equity 1 Correctly recording opening balance of equity Components 1 Correct recording of profit for the year ½ Correct recording of issue of ordinary shares at Premium 3/4 Correct recording of dividend paid ½ Correct recording of closing balance of equity Components 1 5 iii Preparation of statements of financial position:

- Correct title of the statement ¼ Determination and presentation of non-current Assets 13/4 Determination and presentation of current assets 4 Determination of total assets ½ Correct recording of components of equity 1 Correct recording of non-current liabilities 3/4 Determination and presentation of current liabilities 1¼ Determination of total equity and liabilities ½ 10 b) Identification and Accounting for impairment:

- Three correct points on identification at 1 mark each 3 Two correct points on accounting at 1 mark each 2 5 Total 30 17

Okechukwu Plc Consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2019 N'000 Revenue (487,500+330,800-80,000) 738,300 Cost of sales (304,500+258,300-80,000+15,000 (497,800) Gross profit 240,500 Investment income (26,300+10,200-15,000-2000) 19,500 Distribution cost (24,050+13,370) (37,420) Administrative expenses (40,625+21,120+650+3,200 4)+3,200) (65,595) Finance cost (10,500+9,860-2000) (18,360) Profit before taxation 138,625 Income tax expense (33,800+13,000) (46,800) Profit for the year 91,825 Other Comprehensive Income (23,800+10,440) _34,320 Total Comprehensive Income 126,145 Profit attributable to: Owners of parent (Bal. Figure) 86,450 Non-controlling interests _5,375 91,825 Total comprehensive income attributable to: Owners of parent (Bal. Figure) 118,160 Non-controlling interests 7,985 126,145 18 19 OR Okechukwu Plc Group Consolidation Schedule Okechukwu Plc Ogenta Ltd Adjustments CPL N'000 N'000 N'000 N'000 N'000 Revenue 487,500 330,800 (80,000) - 738,300 Cost of sales (304,500) (258,300) (15,000) 8,000 (497,800) Gross profit 183,000 72,500 (95,000) 80,000 240,500 Investment income 26,300 10,200 (15,000+2,000) - 19,500 Distribution cost (24,050) (13,370) - - (37,420) Admin. expenses (40,625) (21,120) (650+3200) - (65,595) Finance costs (10,500) (9,860) - 2,000 (18,360) Profit before taxation 134,125 38,350 (115,850) 82,000 138,625 Income tax expense (33,800) (13,000) - - (46,800) Profit for the year 100,325 25,350 (115,850) 82,000 91,825 Other comprehensive income 23,880 10,440 - - 34,320 Total comprehensive income 124,205 35,790 (115,850) 82,000 126,145 Profit for the attributable to: Equity owners of the parent Non-controlling interest (NCI) 86,450 5,375 91,825 Total comprehensive income attributable to: Equity owners of the parent Non-controlling interest (NCI) 118,160 7,985 126,145

Workings Wk 1: Group structure Okechukwu -------- 75% --------- Ogenta NCI ----------------------25% Wk 2: Unrealised profit URP = 80,000 × 1/4 × 3/4 = N15,000 Wk 3: Intra-group dividend 20,000 × 75% = N15,000 Wk 4: Fair value adjustment N '000 Land and building (5,000,000 ×10%) 500 Land & Building (1.5,000,000 x 10%) 150 Office Equipment (1,500,000 x 10%) Wk 5: Share of subsidiary's profit PFTY N'000 TCI N'000 For the year 25,350 35,790 Impairment losses (3,200) (3,200) Fair Value Adjustment _(650) _(650) 21,500 31,940 NCI @ 25% 5,375 7,985

Examiner’s report The question tests candidates’ knowledge of preparation of consolidated statement of profit or loss and other comprehensive income. Most candidates attempted the question but performance was below average. The pitfall of the candidates was their inability to make necessary adjustments to arrive at the figures that should be posted into the consolidated statement of profit or loss and other comprehensive income. Candidates should be aware that group account is a regular question at the skills level of the Institute examinations, hence they should pay more attention to this section of the syllabus for better performance in future examinations.

Marking guide Marks (a)i Preparation of consolidated statement of profit or loss: Title of the statement ½ Determination and presentation of consolidated revenue 2 Determination and presentation of consolidated cost of sales 2 Determination and presentation of consolidated investment income 2 Determination and presentation of consolidated distribution costs 1½ Determination and presentation of consolidated admin expenses 2 Determination and presentation of consolidated finance cost 2 Determination and presentation of consolidated income tax expense 1½ Determination and presentation of consolidated total comprehensive income 2 Determination of profit attributable to parents and NCI 1½ Determination of total comprehensive income attributable to parent and NCI 1½ Presentation of other relevant workings 1½ Total 20 20

(a) Bases of accounting

i) Accrual basis of accounting: Accrual basis of accounting or the accrual concept recognises transactions and other events and circumstances in the period in which those events 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 and this might not be the same as the period when the cash is received.

• The cost of sales in the statement of profit or loss and other 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.

ii) Cash basis of accounting: Cash basis of 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 and this 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 accrual based accounting and cash based accounting result in recognising the same amounts. However, transactions might be recognised in different periods under each system.

iii) Break-up basis of accounting

• Both the accruals basis and the cash basis assume that a business is a going concern. That means that the business is expected to continue into the future. This may not always be the case.

• A business might be brought to an end or wound-up either due to financial difficulty or, less likely, the owners decide that the business has run its course.

• The break-up basis of accounting is used when the business is no longer a going concern. This basis results in all assets and liabilities being measured at the amount of cash that they can be sold for or settled. 21

(b) IFRS 15 is based on a core principle that requires an entity to recognise revenue:

• In a manner that depicts the transfer of goods or services to customers;

• At an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Applying this core principle involves following a five steps-model as follows: Step 1: Identify the contract(s) with a customer that is, whether the contract is within the scope of IFRS 15 and what to do if IFRS 15 does not apply. Step 2: Identify the separate performance obligations in the contract that is, If IFRS 15 applies, whether the contract contains a single performance obligation or separate performance obligations. Step 3: Determine the transaction price, that is how to identify the transaction price and whether this should be adjusted for time value of money. Also, what to do if the consideration varies depending on circumstance. Step 4: Allocate the transaction price to the performance obligations that is how the transaction price should be allocated to the separate performance obligations. Step 5: Recognise revenue when or as an entity satisfies performance obligations that is whether the performance obligation is satisfied over time or at a point in time.

(c) Disclosure requirements for inventory according to IAS 2 IAS 2 requires the following disclosures in notes to the financial statements.

• The accounting policy adopted for measuring inventories, including the cost measurement method used.

• The total carrying amount of inventories, classified appropriately. (For a manufacturer, appropriate classifications will be raw materials, work-in-progress and finished goods.)

• The amount of inventories carried at net realisable value (NRV).

• The amount of inventories written down in value, and so recognised as an expense during the period.

• Details of any circumstances that have led to the write-down of inventories to NRV. 22

• The amount of any reversal or any write-down value that is recognised as a reduction in the amount of inventories as expense in the period.

• The circumstances or events that led to the reversal of a write-down of inventories.

Examiner’s report This is a theoretical question testing candidates’ knowledge of the three bases of accounting IFRS 15 - Revenue from Contracts With Customers and the disclosure requirements for inventories under IAS 2. More than 50 percent of the candidates attempted the question and performance was above average. The common pitfalls include the following:

• Inability to explain the core principles upon which IFRS 15 is based;

• Candidates failure to clearly explain the difference between accrual basis of accounting and break up basis; and

• Others could not enumerate seven disclosure requirements for inventories which would be shown in the notes to financial statement. Candidates are advised to pay more attention to this area of the syllabus for better performance in future examinations of the Institute.

Marking guide Marks Marks (a) Bases of accounting:

- Correct explanation of accrual basis 2 Correct explanation of cost basis 2 Correct explanation of breakup basis 2 6 (b) Core principles of IFRS 15: Correct explanation of two core principles 2 Correct explanation of five steps-model at 1 mark each 5 7

(c) Disclosure requirements for Inventory : Correct enumeration of seven disclosure requirements for inventory at 1 mark each 7 Total 20 23

(a) Computation of ratios of Onye Nigeria Plc for years 2019 and 2020 2020 2019 (i) Return on capital employed (ROCE) = Profit before interest and tax x 100 Capital employed (2,093+360) x 100 (3,600+5,603+3,600) = 19.16% (1,440+270) x 100 (3,600+3,938+2,700) = 16.70%

(ii) Net profit margin = Profit before interest and tax x 100 Revenue 2,453 x 100 50,400 = 4.87% 1,710 x 100 43,875 = 3.90%

(iii) Gross profit margin = venue (50,400-38,070) x 100 50,400 = 24.46% (43,875-30,713) x 100 Grossprofit × 100 43,875 Re = 30.00%

(iv) Asset turnover = Equity Loan notes 50,400 12,803 = 3.94 times 43,875 Re venue 10,238 += 4.29 times

(v) Current ratio = Current Liabilitie s 8,775 4,297 = 2.04 : 1 7,605 Current assets 3,802 = 2.00 : 1

(vi) Quick ratio = Current liabilites 8,775 – 2,880 4,297 = 1.37 : 1 7,605 – 2,205 3,802 = 1.42 : 1 (vii) Current assets - inventory Receivables collection period = Trade rec. x 365 days Revenue 5,535 x 365days 50,400 = 40days 4,860 x 365days 43,875 = 40day

(viii) Payable payments period = Trade payable x 365 days Purchases 3,375 x 365days 38,070 = 32days 3,105 x 365days 30,713 = 37 day

(ix) Inventory turnover = Average inventory 38,070 2,880 = 13.22 times 30,713 ofCost sales 2,205 = 13.93 times

(x) Gearing Ratios = Debt equity 3,600 x 100 12.803 = 28.12% 2,700 x 100 Debt×100 10.238 += 26.37%

(b) Analysis of performance and liquidity of Onye Nigeria Plc for the year 2020 Profitability performance of the company

• The computed ROCE % and net profit margin of the company in 2020 are above the industrial average and even above that of 2019. This suggests that the company is doing well in terms of profitability. However, the gross profit margin of the company is below the industry average for year 2020 and even declined from 30% in 2019 to 24.4% in 2020. The company needs to look into its cost of sales by ensuring proper control of it in order to improve its gross profit margin in the subsequent years. 24

• In addition, the company’s asset turnover is slightly above the industry average in 2020 but declined from 4.29 times in 2019 to 3.94 times in 2020. The company needs to improve on this by ensuring that it is more efficient in the utilisation of its assets to generate revenue. Liquidity position of the Company

• The computed current ratio and quick ratio of the company in year 2020 are above the industry average. This suggests that the company is doing well in terms of liquidity. Although the quick ratio of the company declined from 1.42:1 in 2019 to 1.37:1 in 2020, the company needs to look into this trend in order to avoid further deterioration.

• Both the computed trade receivables and payables payment days of the company are shorter than the industry average. This indicates that the company is able to recover quickly from its receivables and also pays its payables quickly.

• Although the company’s inventory turnover in 2020 is below the industry average, the company needs to improve on this.

• The computed gearing ratio of the company is below the industry average. This indicates that the company gearing level is within the acceptable range. Although the company’s gearing level slightly increased between 2019 and 2020, the company needs to watch out for this. In general, the company is lowly geared and this is a good position for its business.

(c) The limitation of accounting ratios in financial statement analysis include the following:

1. Heterogeneity or Homogeneity: A company may have various divisions operating in many different industries. This can make it difficult to find comparative industry ratios to use for comparison purposes.

2. Need to determine whether the results of the ratio analyses are consistent: One set of ratios may indicate a problem, whereas another set may indicate that the potential problem is only short-term in nature.

3. Need to use judgment: Although financial ratios are used to help assess the growth and risk profile of a company, they cannot be used alone; the entire operation of the company must be examined, and the external economic and industry setting in which it is operating must be considered when interpreting financial ratios. 25

4. The use of alternative accounting methods: Companies frequently have latitude when choosing certain accounting methods. Ratios obtained from financial statements that employ different accounting choices may not be comparable unless adjustments are made.

5. Management assumptions, basis of estimation and judgment: IFRS is principles based; it requires significant judgement from management of entities, this could result in material differences in the financial statements of the entities. It can also further limit the financial analyses of financial statements with accounting ratios unless further adjustments are made to the accounts.

6. Differences in accounting policies: IFRS as a principle–based financial reporting system, allows alternative treatments of transactions via accounting policy choice. This invariably makes comparison of company’s performance via accounting ratios more difficult and less meaningful unless alignment of the accounting policies of the entities are considered.

7. Use of historical cost data: Decisions about future expectations are based on historical data, which in some cases, makes it difficult and insensitive to reaching economic decision that are likely to take into consideration changes in underlying variables that determine companies performance.

8. Inflation can distort the financial statements: Inflation can distort the financial statements (particularly the statement of financial position). Any problem in the financials caused by inflation can be passed on to ratios.

9. Difference in ratio definitions: Differences in ratio definitions make it difficult to compare ratios from different sources. There can be many different ways to compute the same ratio. This can cause confusion or different answers.

10. Use of Industrial average: Comparison against industry average may not be subjected to factors that are not common in the industry.

11. Lack of comparative figure for a new entity: In a company’s first year of trading, there will be no comparative figures, hence no indicator to compare with. 26

Examiner’s report The question tests the candidates’ knowledge of accounting ratios, its interpretation and limitations of using the ratios. Majority of the candidates attempted the question and performance was good. Most candidates were able to calculate the ratios correctly but were unable to interprete such ratios. Similarly, others could not list the limitations of the ratios. Candidates are advised to pay more attention to this area of the syllabus for better performance in future examinations of the Institute.

Marking guide Marks Marks (a) Computation of financial ratios:

- Correct computation of ten ratios at 1 mark each 10

(b) Analysis of performance and liquidity: Correct analysis of the company’s performance for 2020 using calculated ratios 2½ Correct analysis of the company’s liquidity position for 2020 using relevant ratios 2½ 5

(c) Limitation of accounting ratios in financial statement analysis: Any five correct limitations at 1 mark each 5 Total 20 27

(a) Dongo Limited Statement of cashflows for the year ended December 31, 2020 Operating activities: Profit before interest and taxation N'000 N'000 180,200 Add/Less: Adjustments Depreciation charge for the year (152,650 - 109,340) 43,310 Cashflow from operations before working capital changes 223,510 Working capital changes: Decrease in inventory (107,430 - 96,220) 11,210 Increase in bill receivables (92,610 - 68,100) (24,510) Increase in prepaid expenses (17,200 - 17,000) (200) Decrease in bill payables (69,310 - 40,290) (29,020) Increase in other accrued expenses (20,630 - 8,250) _12,380 (30,140) Interest paid (17,120) Taxation Paid (Wk 1) (32,300) Net cashflows from operating activities 143,950 Investing activities: Investment income 8,100 Purchase of PPE (370,300 - 212,000) (158,300) Net cashflows from investing activities (150,200) Financing Activities: Proceeds from issue of shares (135,000 - 105,000) 30,000 Proceeds from issue of loan notes (85,000 - 55,000) 30,000 Dividend paid (85,870) Net cashflows from financing activities (25,870) Net increase in cash and cash equivalents for the year (32,120) Cash and cash equivalents at the beginning _(2,790) Cash and cash equivalents at the end (34,910)

Workings Wk 1: Taxation Paid N'000 Opening balance 32,300 Income tax expenses (SOPL) 37,000 Expected closing balance 69,300 Actual closing balance 37,000 Taxation paid 32,300 28

(b) Computation of current ratio for the year ended December 31, 2020 2019 Current ratio = Current Current liabilitie asset s = 206,030 192,530 132,830 112,650 =1,55:1 =1.71:1

(c) The technical reasons which accounted for the company’s rise in overdraft for the two years are:

i) Huge payment of dividend to ordinary shareholders. ii) Excess investment in the purchase of property, plant and equipment using short term fund. iii) Significant decrease in bills payable. iv) Payment of previous year tax liability. v) The bill receivable also rose by N24,510,000 and this drastically affected the increase in the bank overdraft in 2020.

Examiner’s report The question tests candidates’ knowledge of preparation of statement of cash flow using indirect method, in accordance with the provisions of IAS 7. Majority of the candidate attempted the question and performance was fair. The commonest pitfall was the inability of the candidates to identify three technical reasons why the company’s overdraft increase over the years. Candidates are advised to pay more attention to this area of the syllabus for better performance in future examinations.

Marking guide Marks (a) Preparation of statement of cash flows:

- Correct computation and presentation of statement 10 of of cash flows

(b) Computation of current ratios: Correct computation of the company’s current ratios for 2019 and 2020 at 1 mark each 2

(c) Technical reasons for rise in overdraft: Correct three points at 1 mark each 3 Total 15 29

(a)i Research and Development The term research and development is commonly used to describe work on the innovation, design, development and testing of new products, processes and systems. Research – Research is an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Examples of research activities include:

• Activities aimed at obtaining new knowledge.

• The search for and evaluation of applications of knowledge obtained from research.

• The search for alternative materials, products or processes.

• The formulation and testing of possible alternatives for new materials, products or processes. Development: Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Examples of Development activities include:

(i) The design, construction and testing of pre-production prototypes and models. (ii) The design of tools involving new technology (iii) The construction and operation of a pilot plant that is not large enough for economic commercial production. (iv) The design, construction and testing of new materials, products or processes.

(ii) Conditions for recognising development costs as an intangible asset.

• It is technically feasible to complete the development project.

• The company intends to complete the development of the asset and then use or sell it.

• The asset that is being developed is capable of being used or sold.

• Future economic benefits can be generated. This might be proved by the existence of a market for the asset’s output or the usefulness of the asset within the company itself.

• Resources are available to complete the development project.

• The development expenditure can be measured reliably (for example, via costing records). 30

(b) Olugbenga Nigeria Limited Schedule of movement in intangible assets for the year ended March 31, 2021 Devt Cost Software Goodwill Total Cost: N'm N'm N'm N'm Balance as at April 1, 2020 1,595 418 4,050 6,063 Additions 330 91 - 421 Disposal (160) (12) - (172) Business combination - _-_ _102 _102 Balance as at March 31, 2021 1,765 497 4,152 6,414 Acc. amortisation & impairment: Balance as at April 1, 2020 775 204 540 1,519 Impairment loss recognised - - 82 82 Amortisation for the year 177 33 - 210 Disposal (110) (40) _-_ (150) Balance as at March 31, 2021 842 197 622 1,661 Carrying amount: Balance as at March 31, 2021 924 300 3,530 4,753 Balance as at April 1, 2020 820 214 3,510 4,544

Examiner’s report The question tests the candidates’ knowledge of accounting for internally generated intangible assets in accordance with the provision of IAS 38. Candidates are also required to prepare schedule of movement of intangible assets that are disclosed in notes to the financial statements. Few of the candidates attempted this question and performance was poor. Most candidates that attempted the question could not correctly explain the term research and development while others could not give appropriate examples of research and developments expenditure. Also, some candidates could not correctly prepare schedule of movement of intangible assets. Candidates are advised to pay more attention to this section of the syllabus for better performance in future examinations. 31

Marking guide Marks Marks (a)i Research and development:

- Correct explanation of the term research 1 Two correct examples of research at ½ mark each 1 Correct explanation of the term development 1 Two correct examples of development at ½ mark each 1 4 (a)ii Recognition of development costs: Correct identification of five conditions for recognising development costs at 1 mark each 5 9

(b) Preparation of schedule of movement in intangibles for the year: Correct preparation of schedule for movement in intangibles with subheads for development cost, software, goodwill and total 6 Total 15 32

(a) Qualitative characteristics of General Purpose Financial Statements are:

i) Relevance; ii) Faithful representation; iii) Comparability; iv) Verifiability; v) Timeliness; and vi) Understandability

i) Relevance: Information must be relevant to the decision-making needs of users. Information is relevant if it can be used for predictive and/or confirmatory purposes.

• It has predictive value if it helps users to predict what might happen in the future.

• It has confirmatory value if it helps users to confirm the assessments and predictions they have made in the past. The relevance of information is affected by its materiality. Information is material if omitting it or misstating it could reasonably be expected to influence decisions of the primary users based on financial statements.

• Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report.

• Therefore, it is not possible for the IASB to specify a Uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.

• Faithful representation: Financial reports represent economic phenomena (economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims) by depicting them in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. A perfectly faithful representation would have three characteristics. It would be: 33

• Complete – the depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations;

• Neutral – the depiction is without bias in the selection or presentation of financial information; and

• Free from error – where there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process.

ii) Comparability: Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity. For another period or another date. Consistency is related to comparability but is not the same. Consistency refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities. Consistency helps to achieve the goal of comparability.

iii) Verifiability: This quality helps assure users that information Faithfully represents the economic phenomena it purports to represent.

• Verifiability means that different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.

• Quantified information need not be a single point estimate to be verifiable. A range of possible amounts and the related Probabilities can also be verified.

iv) Timeliness: This means having information available to decision- makers in time to be capable of influencing their decisions.

v) Understandability: Information is made understandable by classifying, characterising and presenting it in a clear and concise manner. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information diligently.

(b) Models of valuation recognised in IAS 16 – Property, Plant and Equipment All items of property, plant and equipment in a class can be accounted for using one of two models: 34

i) Cost model - Property, plant and equipment is carried at cost less any accumulated depreciation and any accumulated impairment losses. ii) Revaluation model - Property, plant and equipment is carried at a revalued amount. This is the fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses. The same model should be applied to all assets in the same class. For example, a company’s policy might be to value all its motor vehicles at cost, but to apply the revaluation model to all its land and buildings.

Examiner’s report The question tests the candidates’ knowledge of qualitative characteristics of general purpose financial information and model of valuation of property, plant and equipment (PPE) in accordance with IAS 16. Most candidates attempted the question and performance was above average. The commonest pitfall was their inability to correctly identify the two models of valuation of PPE. Candidates are advised to pay more attention to all sections of the syllabus for better performance in future examinations.

Marking guide Marks Marks (a) Qualitative characteristics of financial information:

- Correct identification of five qualitative - characteristics at 1 mark each 5 Correct explanation of five qualitative characteristics at 1 mark each 5 10

(b) Two models of valuation for PPE: Correct explanation of cost model 2½ Correct explanation of revaluation model 2½ 5 Total 15 35 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA