Financial Reporting · May 2022

Endtime PLC a) Statement of profit or loss and other Comprehensive income for the year ended December 31, 2020

Note N'Million Revenue 226,625 Cost of sales 1 142,150 Gross profit 84,475 Other incomes 2 6,500 Administrative expenses 3 (34,541) Distribution cost 4 (15,300) Operating profit 41,134 Finance cost 5 (3,500) Profit before taxation 37,634 Income tax expense 6 (8,400) Profit for the year 29,234 Other comprehensive income: Gain on revaluation of land and buildings 13,000 Total comprehensive income 42,234 12 Endtime PLC b) Statement of changes in equity for the year ended December 31, 2020 Ordinary shares N’million Revaluation reserve N’million Retained earnings N’million Total equity N’million Balance b/f 40,000 20,000 16,500 76,500 Profit for the year 29,234 29,234 Gain on revaluation - 13,000 - 13,000 Ordinary dividend - - (2,000) (2,000) 40,000 33,000 43,734 116,734

c) Endtime PLC Statement of financial position as at December 31, 2020 Non-current assets: Note N’million Property, plant and equipment 7 & 8 102,606 Investment property 9 14,000 Intangible assets: Multi-Users S&P and Sage Accounting Software 10 6,878 Total non-current assets 123,484 Current assets: Inventory 11 9,710 Trade receivables 10,000 Plant held for sales 12 5,640 Total current asset 25,350 Total assets 148,834 Equity and liabilities: Equity: Ordinary shares of N0.50 each 40,000 Revaluation reserves on land and buildings 33,000 Retained earnings 43,734 Equity 116,734 Non-current liabilities: 15% preference shares 13,000 Deferred tax liabilities 13 3,600 16,600 Current liabilities: Trade payables 3,000 Bank Overdraft 3,500 Current tax payables 9,000 Total current liabilities 15,500 Total equity and liabilities 148,834 13

Notes to the Accounts Wk I: Cost of sales N'million Balance per trial balance 140,000 Closing inventory written down 290 Impairment of plant held for sales 1,860 Statement of profit or loss (SOPL) 142,150 Wk 2: Other income N'Million Reversal of allowance for doubtful debt 2,000 Rental income from investment property 2,500 Discount received 2,000 SOPL 6,500 Wk 3: Administrative expenses N'million Balance per trial balance 26,200 Customisation and handling cost (800) Consultancy fees (600) Depreciation on land & building (Wk 7) 3,100 Depreciation on plant & equipment (Wk 8) 5,419 Loss on revaluation of investment property 1,000 Amortisation of Multi-Users S&P and Sage 222 SOPL 34,541 Wk 4: Distribution cost N'Million Balance per trial balance 12,300 Discount allowed 3,000 SOPL 15,300 Wk 5: Finance cost N'Million Balance per trial balance 5,500 Less: Ord. div. (2.5k x 40,000/0.50) (2,000) SOPL 3,500 Wk 6: Income tax expense N'Million Current year tax 9,000 Decrease in deferred tax (Wk 13) (600) SOPL 8,400 Wk 7: Land and buildings N'Million Opening balance 62,000 Depreciation for the year (N62,000/20years) (3,100) Carrying amount 58,900 Gain on revaluation 13,000 Revalued amount 71,900 14 Wk 8: Plant and equipment N'Million Cost b/f 50,000 Accumulated depreciation b/f (13,875) Carrying amount b/f 36,125 Depreciation for the year (15% x 36,125) (5,419) Revalued amount 30,706 Wk 9: Investment property N'Million Cost b/f 15,000 Revalued amount (SOFP) (14,000) Loss on revaluation (SOPL) 1,000 Wk 10: Multi-Users S&P and Sage Acc N'Million Purchase cost 5,700 Customisation and handling cost 800 Consultancy fees 600 Total cost 7,100 Amortisation (12.5% x 7,100 x 3/12) (222) Carrying amount (SOFP) 6,878 Wk 11: Closing inventory N'Million N'Million Balance b/f 10,000 Less Written down: Cost of damaged inventory (790) Net realisable value: Expected selling price 940 Further cost to enable sales (440) (290) Revised closing inventory 9,710 Wk 12: Plant held for sale N'Million Carrying amount 7,500 Recoverable amount: Fair value 6,000 Cost to sales (6% x 6,000) (360) 5,640 The Plant held for sales should be recognised at N5,640 million (being the lower of the carrying amount and the recoverable amount) while the difference between them N7,500 million – N5,640 million (N1,860 million) will be recognised in the SOPL. 15 Wk 13: Deferred taxation N'Million Opening balance 4,200 Closing balance (12,000 x 30%) 3,600 Decrease in deferred tax (600)

Examiner’s report The question tests candidates’ knowledge of preparation of final accounts in accordance with the provisions of relevant accounting standards. Majority of the candidates attempted the question and performance was average. The common pitfalls of the candidates were their inability to determine the cost of software to be capitalised as well as the amount of property held for sale to be disclosed in the statement of financial position. Also, some candidates showed preference shares as part of equity instead of non-current liabilities. Candidates are advised to pay more attention to the preparation of final accounts and the application of relevant accounting standards required for such preparations for better performance in future examination of the Institute.

Marking guide Marks Marks a) Preparation of statement of profit or loss and other comprehensive income

- Title of the statement ½ - Determination of gross profit 2½ - Determination of profit before taxation 7 - Determination of profit for the year 2 - Determination of total comprehensive income 1 13 b) Preparation of statement of changes in equity

- Title of the statement ¼ - Determination of ordinary share capital 3/4 - Determination of revaluation reserve 1 - Determination of retained earnings 1 - Determination of total equity 1 4 c) Preparation of statement of financial position

- Title of the statement ¼ - Determination of non-current assets 6 - Determination of current assets 4 - Determination of equity 1 - Determination of non-current liabilities 3/4 - Determination of current liabilities 1 13 Total 30 16

(a) Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting its financial statements. These include any accounting methods, measurement systems and procedures for presenting disclosures. Accounting policies differ from accounting principles in that the principles are the accounting rules and the policies are a company's way of adhering to those rules. e.g. depreciation policies, inventory policies, etc. Accounting estimates on the other hand are “approximation of the amount of a business transaction for which there are no precise means of measurement.” Estimates are used in accrual basis accounting to make the financial statements more complete, usually to anticipate events that have not yet occurred but are considered probable. These estimates may be subsequently revised as more information becomes available. Accounting estimates arise from inherent uncertainties in business activities which mean that many items in financial statements cannot be measured with precision but can only be estimated. Estimates are formed using judgements based on the latest available and reliable information. Common examples of estimates in the financial statements include: i. Allowances for bad debts; ii. Allowances for inventory obsolescence; iii. The fair value of financial assets or financial liabilities; iv. The useful lives of, or the expected pattern of consumption of the future economic benefits embodied in depreciable assets; and v. Warranty obligations. 17

b) INTERNAL MEMORANDUM From: Head-Accounting Department Date: May 18th, 2022 To: Finance Director Subject: Presentation on distinction between changes in accounting policies and changes in accounting estimates Further to your request on the subject matter, this presentation aims at highlighting the distinguishing features between changes in accounting policies and changes in accounting estimates in accordance with IAS 8-Changes in Accounting Policies, Changes in Accounting Estimates and Errors. Changes in accounting policies

i. An entity must apply consistent accounting policies in a period to deal with similar transactions, other events and circumstances so that they can identify trends in its financial performance or financial position.

ii. A change in accounting policies entails a deviation from the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting its financial statements. Frequent changes in accounting policies are therefore undesirable because they make comparisons with previous periods more difficult.

iii. A change in accounting policy can be established where there is a change in recognition, measurement or presentation criteria of transactions and other events in the financial statement. For example, an entity which previously used the cost model to measure investment properties but decided to use fair value model instead in the current accounting year, has changed its accounting policy. Changes in accounting policies most times require retrospective application. Changes in accounting estimates

i. A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.

ii. A change in accounting estimate may be needed if changes occur in the circumstances on which the estimate was based, or if new information becomes available. Therefore, change in accounting estimates is not the result of discovering an error in the way an item has been accounted for in the past and it is not a correction of an error. 18

iii. Any change in the estimated useful life of a non-current asset would result in a change in the amount of annual depreciation charged on the asset and this is a change in accounting estimate. Accounting treatment of changes in accounting estimates

i. A change in accounting estimate is accounted for prospectively not retrospectively. This means that the effect of the change is recognised in the current period and the future periods affected by the change. That is, it is recognised by including it:

ii. In statement of profit or loss for the period in which the change is made, if the change affects that period only, or

iii. In statement of profit or loss for the period of change and future periods, if the change affects both.

iv. To the extent that a change in estimate results in change in assets and liabilities, it should be recognised by adjusting the carrying amount of the affected assets or liabilities in the period of change. Hope the above explanation would be found useful for the purpose required. Thank you. Signed XYZ (c) Eze Nigeria Limited Comparative statement of financial position (extract) as at June 30, Assets: Notes 2020 2019 Non-current assets: N'000 N'000 Property, plant and equipment 1 1,172,000 1,086,000 Intangible assets 2 333,000 990,000 19

Notes to the accounts 1. Schedule of movement in PPE for the year ended June 30, 2020 FHP - land FHP - building Office equipment Total Cost: N'000 N'000 N'000 N'000 Balance as at July 1, 2019 395,000 600,000 525,000 1,520,000 Additions - - 150,000 150,000 Gain on revaluation 15,000 60,000 __-__ 75,000 Balance as at June 30, 2020 410,000 660,000 675,000 1,745,000 Accm. depreciation: Balance as at July 1, 2019 - 100,000 334,000 434,000 Depreciation for the year - 28,000 111,000 139,000 Balance as at June 30, 2020 - 128,000 445,000 573,000 Carrying amount: Balance as at June 30, 2020 410,000 532,000 230,000 1,172,000 Balance as at July 1, 2019 395,000 500,000 191,000 1,086,000

2. Schedule of movement in intangible assets for the year ended June 30, 2020 Computer Software Cost: N'000 Balance as at July 1, 2019 1,100,000 Additions -___ Balance as at June 30, 2020 1,100,000 Accm. amortisation and impairment: Balance as at July 1, 2019 110,000 Amortisation for the year 110,000 Impairment loss recognised 547,000 Balance as at June 30, 2020 767,000 Carrying amount: Balance as at June 30, 2020 333,000 Balance as at July 1, 2019 990,000 20

Examiner’s report The question tests candidates’ knowledge of the provisions of IAS 8 - Accounting policies, changes in accounting estimate and errors. Candidates’ are required to explain accounting policies and accounting estimates in part (a), differences between accounting policies and accounting estimates in part (b), while part (c) requires the preparation of schedule of movement of PPE and statement of financial position extracts. Few candidates attempted the question and their performance was below average. The common pitfalls were inability of the candidates to correctly explain and differentiate between accounting policies and accounting estimates, while others could not prepare the schedule of movement of PPE. Candidates are advised to pay more attention to relevant provisions of international financial reporting standards that are relevant to skills level of the Institute of Chartered Accountants of Nigeria for better performance in future examinations.

Marking guide Marks Marks a) Explanation of accounting policies and estimates

- Definition of accounting policies ½ - Correct explanation of accounting policies ½ - One (1) correct example of accounting policies ½ - Definition of accounting estimates ½ - Correct explanation of accounting estimates ½ - One (1) correct example of accounting estimates ½ 3 b) Memo on the difference between accounting policies and accounting estimates - Memo format ½ - Introduction/preamble ½ - Two correct points on accounting policies at 1 mark each 2 - Two correct points on accounting estimates at 1 mark each 2 - Two correct points on accounting treatments for changes in accounting estimates at 1 mark each 2 - Concluding remarks ½ - Closing/signature ½ 8 c) Preparation of statement of financial position

- Presentation of extract of statement of financial position ¼ - Schedule of movement in PPE 53/4 - Schedule of movement in intangibles 3 9 Total 20 21

Daddy PLC Consolidated statement of financial position as at December 31, 2020 Non-current asset: Notes N'billion Property, plant and equipment (650+350+50-20) 1,030 Intangible (40-40) - Goodwill 3 _196 Total non-current assets 1,226 Current asset: Inventories (100+25-2) 123 Trade receivables (190+70-14) 246 Bank (0+35+5) 40 Contingent assets _12 Total current assets 421 Total assets 1,647 Equity: Ordinary shares (350+80) 430 Share premium 8 160 Retained earnings 6 296 886 Non-controlling interest (NCI) 5 _94 Total equity 980 Non-current liabilities: 12% Loan notes (160+40) 200 Current liabilities: Payables (150+60-9) 201 Other accrued expenses (40+20) 60 Current tax (50+30) 80 Bank (30+0+96) 126 Total current liabilities 467 Total liabilities 667 Total equity and liabilities 1,647 Working notes Wk 1: Group structure Daddy PLC ---------------80% (640/(200/0.25)--------------- Mummy PLC NCI = 20% 22 At acq. Wk 2: Net asset of subsidiary date Post-acq. N'billion N'billion N'billion Ordinary share 200 200 - Retained earnings 170 120 50 Fair value adjustment: Property 50 50 - Depreciation (20) - (20) Intangibles (40) - (40) Contingent assets 12 - 12 372 370 2 Wk 3: Determination of goodwill on acquisition N'billion N'billion Fair value of consideration transfer: Share exchange (1/2 x 640 x 0.75) 240 Loan note (640/400 x N100) 160 Cash (0.15 x 640) 96 496 NCI at fair value 100 596 Less: Net assets of subsidiary at acquisition (370) Goodwill at acquisition 226 Impairment (30) Goodwill at reporting 196 Wk 4: Unrealised profit (URP) N'billion URP = 5 x 8/20 = 2.00 Dr - NCI (20% x 2) 0.40 Dr - Retained earnings (80% x 2) 1.60 Cr – Inventory 2.00 Wk 5: Valuation of NCI N'billion NCI at acquisition (Wk 3) 100.0 Add: Share of post-acquisition profit (20% x 2) 0.4 Unrealised profit (20% x 2) (0.4) Impairment of goodwill (20% x 30) (6.0) 94.0 23 At reporting date Wk 6: Consolidated retained earnings N'billion Daddy PLC (220 + 100) 320 Add: Share of post-acquisition profit (80% x 2) 1.6 Unrealised profit (80% x 2) (1.6) Impairment of goodwill (80% x 30) (24.0) Consolidated retained earnings 296 Wk 7: Cash consideration N'billion Dr - Cost of investment 96 Cr – Cash 96 Wk 8: Share exchange N'billion Ordinary share (1/2 x 640 x 0.25) 80 Share premium (1/2 x 640 x 0.50) 160 Wk 9: Additional depreciation N'billion N5 x 4 quarters 20

Examiner’s report The question is on preparation of consolidated statement of financial position. Majority of the candidates attempted the question and performance was above average. The pitfall of the candidates was their inability to correctly calculate the goodwill arising from consolidation and determination of consolidated retained earnings. Candidates are advised to note that question on group accounts are regular features at this level of the Institute’s examinations hence, they are advised to pay more attention to this area of the syllabus for better performance in future examinations. 24

Marking guide Marks Preparation of consolidated statement of financial position

- Title of the statement ¼ - Determination of group structure ½ - Determination of goodwill on acquisition 3 - Determination of non-current assets 2 - Determination of current assets 3 - Determination of equity 2 - Calculation of non-controlling interest 2¼ - Determination of non-current liabilities ½ - Determination of current liabilities 2 - Workings of unrealised profit 1 - Workings of subsidiary’s net assets 1½ - Workings of consolidated retained earnings 1½ - Workings of additional depreciation ½ Total 20

Odibeze Nigeria PLC Statement of cashflows for the year ended April 30, 2021

Notes N'000 N'000 Cash flows from operating activities Profit before taxation 85,340 Adjustments: Depreciation charged on freehold 4 50,000 Depreciation charged on plant and machinery 3 24,000 Impairment loss 10,000 Loss on sale of plant (N20,000 – 11,200) 8,800 Finance cost 26,000 Goodwill written-off 38,500 Interest received (18.000) 139,300 Changes in operating assets/liabilities: Increase in inventories (60,700) Increase in trade receivables (13,050) Decrease in trade payables (89,700) (163,450) Cash generated from operations 61,190 Tax paid 2 (70,540) Interest paid (26,000) Net cash used in operations (35,350) 25 Cash flows from investing activities: Payment for purchase of plant 3 (22,000) Proceed from sale of plant 11,200 Interest received 18,000 Payment for purchase of trade investment (42,000) Net cash inflows from investing activities (34,800) Cash flows from financing activities: Proceed from issue of ordinary shares 57,000 Proceed from issue of preference shares 32,000 Dividend paid (25,000) Net cash inflows from financing activities 64,000 Net decrease in cash and cash equivalents (6,150) Opening cash and cash equivalents (19,900) Closing cash and cash equivalents 26,050 Working notes Wk 1: Cash and cash equivalents: Closing N’000 Opening N’000 Change N’000 Cash and bank 64,000 10,200 53,800 Bank overdraft (90,050) (30,100) (59,950) (26,050) (19,900) (6,150) Wk 2: Taxation N’000 Balance b/f 107,400 Per profit or loss 28,340 135,740 Less: Closing balance c/f (65,200) Cash/bank 70,540 Wk 3: Plant and machinery N’000 Opening balance b/f 242,000 Disposal (20,000) Depreciation (24,000) 198,000 Closing balance c/f 220,000 Cash/bank 22,000 26 Wk 4: Freehold properties N’000 Opening balance b/f 385,000 Revaluation surplus 15,000 400,000 Closing balance c/f (350,000) Depreciation charged 50,000 Wk 5: Trade investment N’000 Opening balance b/f 88,000 Impairment loss (10,000) 78,000 Closing balance c/f 120,000 Cash/bank 42,000 Wk 6: Proceed from issued shares at premium Opening issued share capital N72,000,000 Number of shares in issue = N72,000,000 N1.20 = 60,000,000 Shares Bonus issue of 1 for 6 = 10,0000,000 shares 70,000,000 shares Numbers shares in issue at April 30, 2021 = N120,000,000 N1.20 = 1000,000,000 shares No of shares issued for cash (100,000,000 – 70,000,000) = 30,000,000 shares Value of issue = 30,000,000 at N1.90 = N57,000,000 27

b) Cash and cash equivalents Cash comprises cash on hand and demand deposits denominated in naira and foreign currencies. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Examples include cash in hand, cash at bank, bank overdraft, short-term investments like treasury bills and treasury certificates.

Examiner’s report The question tests candidates’ knowledge of preparation of statement of cash flows using indirect method and explanation of cash and cash equivalents. Most candidates attempted the question and performance was average. The common pitfalls of the candidates were their inability to determine the number of bonus shares issued by the company and the number of shares paid for on cash basis. Candidates are advised to pay more attention to IAS 7 – statement of cash flows for better performance in future examinations.

Marking guide Marks Marks a) Presentation of statement of cash flows:

- Title of statement ¼ - Stating cash flows from operating activities 6½ - Stating cash flows from investing activities 4 - Stating cash flows from financing activities 3¼ - Stating cash and cash equivalents 3 17 b) Cash and cash equivalents

- Correct explanation of cash and cash equivalents 1½ - Three (3) correct examples of cash and cash equivalents 1½ 3 Total 20 28

(a) Differentiate between:

i) Contract liabilities versus contract assets The contract liability is a supplier's obligation to transfer goods or services to a customer for which it has received consideration (an amount of consideration due) from the customer. This situation normally occurs where the contract require payment in advance or allow the supplier a right to an amount of consideration that is unconditional before it transfers good and service to the customer. A contract asset on the other hand is a supplier's right to consideration in exchange for goods or services that it has transferred to a customer. A contract asset is reclassified as a receivable when the supplier’s right to consideration becomes unconditional. It usually occurs where a supplier transfer goods and services to a customer before the customer pays consideration or before payment is due.

ii) Stand-alone selling price versus transaction price Stand-alone selling price is the price at which an entity would sell a promised goods and services separately to a customer. The stand-alone selling price which is determined at the inception of the contract is the basis upon which the transaction price will be allocated to each performance obligations in a contract. The objective of which is to depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. Transaction price on the other hand is the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract, excluding any amounts collected on behalf of third parties (for example, sales taxe). An entity must consider the terms of the contract and its customary practices in determining the transaction price. The transaction price is adjusted if the entity (e.g. based on its customary business practices) has created a valid expectation that it will enforce its rights for only a portion of the contract price. The transaction price is affected by the nature, timing and amount of consideration promised by a customer. 29

(b) Criteria for assessing a contract under IFRS 15 are:

i. The parties to the contract have approved the contract; ii. The parties to the contract are committed to perform the contract obligations; iii. The entity can identify each party’s rights regarding the goods or services to be transferred; iv. The entity can identify the payment terms for the goods or services to be transferred; v. The contract has commercial substance in terms of amount of future cash inflows; vi. The contract has commercial substance in terms of risk assessment and timing of contract obligations; and vii. It is probable that an entity will collect the consideration in terms of customer’s ability and intention to pay. (c)

(i) Explanation of contract modification

• A contract modification is a change in the scope of a contact that is approved by the parties to the contract.

• It exists when the parties to a contract approve a modification that creates new or changes existing enforceable rights and obligations of the parties to the contract.

• It could be approved in writing, by oral or implied by the customary business practices.

(ii) Methods of accounting for contract modification

• As a separate contract from the existing contract.

• As a termination of the existing contract.

• As part of the existing contract, that is, as cumulative catch-up adjustments.

Examiner’s report The question tests the candidates’ knowledge of basic terminologies of contract and contract price under IFRS 15 - Revenue from contract with customers as well as criteria for assessing contract and way of accounting for contract modifications. Few candidates attempted the question and performance was poor. Majority of the candidates were able to state the criteria for assessing contract under IFRS 15, but they could not explain basic terminologies of contract/contract price under the accounting standard. 30 Candidates are advised to pay more attention to all sections of the syllabus and also all relevant international financial reporting standards at this level of the Institute’s examinations.

Marking guide Marks Marks a) Comparison IFRS 15 terms i) Contract liabilities versus Contract assets:

- Correct definition and explanation 1½ - Two (2) correct examples at ½ mark each 1 ii) Stand-alone-selling price versus Transaction price

- Correct definition and explanation 1½ - Two (2) correct examples at ½ mark each 1 5

b) Criteria for assessment of contract

- Stating six (6) correct criteria at 1 mark 6

c) Contract modification

- Correct explanation of contract modification 2 - Correct explanation of accounting for contract modification 2 4 Total 15

a) Fundamental qualitative characteristics

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 users based on the 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. 31

ii) 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:

• 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. Enhancing qualitative characteristics (i) 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 it 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.

(ii) 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. 32

iii) Timeliness: This means having information available to decision-makers in time to be capable of influencing their decisions. iv) 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) Main objectives of FRCoN as defined in the Act establishing the institution are: i) To protect investors and other stakeholder’s interest; ii) To give guidance on issues relating to financial reporting and corporate governance to professional, institutional and regulatory bodies in Nigeria; iii) To ensure good corporate governance practices in the public and private sectors of the Nigerian economy; iv) To ensure accuracy and reliability of financial reports and corporate disclosures, pursuant to the various laws and regulations currently in existence in Nigeria; v) To harmonise activities of relevant professional and regulatory bodies as relating to corporate governance and financial reporting; vi) To promote the highest standards among auditors and other professionals engaged in the financial reporting process; vii) To enhance the credibility of financial reporting; and viii) To improve the quality of accountancy and audit services, actuarial, valuation and corporate governance standards.

c) The two concepts of capital maintenance are:

i. A financial concept of capital The capital of an entity is measured as its net assets, which is also its equity.

• Where a financial concept of capital is used, the main concern of users of the financial statements is with the maintenance of the nominal financial capital of the entity.

• With financial concept of capital maintenance, a profit is not earned during a period unless (excluding new equity capital raised during the period and adding back any distribution of dividends to shareholders) the financial value of equity (net assets) at the end of the period exceeds the financial value of equity at the beginning of the period. 33

ii. A physical concept of capital The capital of an entity is represented by its productive capacity or operating capability. Where a physical concept of capital is used, the main concern of users of the financial statements is with the maintenance of the operating capability of the entity.

• With a physical concept of capital maintenance, a profit is not earned during a period unless (excluding new equity capital raised during the period and adding back any distribution of dividends to shareholders) the operating capability of the business is greater at the end of the period than at the beginning of the period. Current value accounting reflects the concept of physical capital maintenance.

• In a period of inflation, profits reported using a financial concept of capital will normally be higher than profits reported using a physical concept of capital, such as current value accounting.

• Financial capital maintenance is likely to be the most relevant to investors as they are interested in maximising the return on their investment and therefore, its purchasing power while physical capital maintenance is likely to be most relevant to management and employees as they are interested in assessing an entity’s ability to maintain its operating capacity.

Examiner’s report The question tests candidates’ knowledge of IASB conceptual frame work of financial reporting in part (a), part (b) requires candidates to state the objective of Financial Reporting Council of Nigeria (FRCoN) and part (c) requires that candidates should explain the term financial capital maintenance and physical capital maintenance. Most candidates attempted the question and performance was average. Majority of the candidates were able to explain qualitative characteristics of financial statement. However, many of them could not explain the concepts of financial capital and physical capital maintenance. Candidates are advised to cover all sections of the syllabus for better performance in future examinations. 34

Marking guide Marks Marks a) Discussion of the qualitative characteristics:

i) Fundamental qualitative characteristics:

- Correct discussion of relevance 2 - Correct discussion of faithful representation 2 ii) Three (3) correct discussion of enhancing qualitative characteristics at 2 marks each 6 10

b) Main objectives of financial reporting council of Nigeria:

- Stating four correct objectives at ½ mark each 2

c) Concepts of capital maintenance

- Explanation of financial capital maintenance - Three (3) points at ½ mark each 1½ - Explanation of physical capital maintenance - Three (3) points at ½ mark each 1½ 3 Total 15

(a) Computation of additional ratios for the year ended December 31, 2020 Owerri PLC Warri Health PLC Industrial Average Cost of sale ratio = Cost of sales Revenue Revenue– gross profit margin revenue = 100% - Gross profit margin = 100% - 32.6% = 67.40% Revenue – gross profit margin revenue = 100% - Gross profit margin = 100% - 38.5% = 61.50% 60% Earnings yield = Earnings Per Share_ Market Price Per Share Reciprocal of P/E Ratio ___1 x 100%___ Price Earnings ratio 1 x 100% 5.6 times = 17.86% Reciprocal of P/E Ratio ___1 x 100%___ Price Earnings ratio 1 x 100% 2.5 times = 40% 12.00% 35

(b) INTERNAL MEMORANDUM TO: Chief Accountant FROM: Senior Accountant SUBJECT: Financial statements analysis and evaluation of potential acquisition of Warri Health PLC. DATE: May 10, 2022 The above subject refers. The Board of our company is in the planning phase of the potential acquisition of Owerri Health PLC, a quoted company like ours on the Nigeria Stock Exchange (NSE), but within the health industry. In aiding the board’s decision on the acquisition of the target or not, there is a pivotal role the finance department is professionally required to perform, this includes evaluation of the performance of the target company comparing this with the industry average and with our performance. First, to advise the Board on the suitability of the acquisition from the historical performance of the company’s perspective, I have used financial statements analysis with the aid of financial ratios to carry out the performance measurement. The financial ratios used are in four categories: profitability, liquidity, gearing/stability and investment ratios. The outcome and findings on each category, regarding the target's performance are as stated in the subsequent paragraphs. Profitability: The target company's performance, based on gross margin is higher than both the industry average and ours. These show how well the company has been able to increase its revenue in relation to its cost of sales. Similarly, it was also able to control its operating expenses as the expense ratio is hugely lower than both the industry average and that of our company. Surprisingly, this does not translate to good performance or better net profit margin. A further evaluation of other information and metrics revealed that the company is highly levered (as its gearing ratio is exceptionally excessive and may not able to have sufficient profit that would cover its future interest expenses, resulting in inadequate interest coverage). Also, the tax burden, if not well managed, may contribute to the poor performance of its net profit margin, thereby may not have harnessed a robust and effective tax planning and optimisation strategy. 36 Liquidity: The liquidity position of the target is solid and placed the target company in a more advantageous position than its peers in the industry and our company. In terms of liquidity measures, the company is twice as that of the industry average and our company. Though this may look good on the surface, with its excessive leverage by way of borrowing, it may have obtained more borrowings than required for its sustainable capacity and operations as a sustainable business; thereby resulting in the short-term high-positive liquidity it found itself, and this may be at the expense of loss of value to the shareholders as it traded-off for its profitability because of avoidable finance costs that may have been avoided if it has put up sound and efficient working capital and long-term financial management creating a balance between short-term solvency and long-term stability of the business on a sustainable basis. Gearing/stability: There is a red flag on the target company’s long-term borrowing trajectory. It does not match its capacity and profitability, thereby creating excessive leverage with a potential for future increases in the cost of financing debt and possible replacement. The capital and interest measures of leverage both pointed in the same direction which is a possible setback in its capacity structure and funding strategy. Investors’ returns: The target company is expect to have very low earnings per share (EPS) because of its low equity mix to its total capital, thereby creating a colossal interest burden that subsumed its high gross and operating margins. The EPS of the target company is just about 40% of the EPS of our Company, though it is higher than industry average. This simply implies that it may not be doing badly in making returns to investors based on the industry average but is unlikely to meet our Board’s return expectation. We currently are more than twice the target's current performance. Similarly, the direction of the Price-Earnings ratio speaks to the value and premium the capital market is placing on the companies within the market based on market information and future expectations. Secondly, based on the evaluation of the performance based on financial ratios, the company seems not to be doing badly, but if based on other factors, especially qualitative considerations, and the management found the target company is worth acquiring, the Board will have to revisit the under-listed issues.

(i) The capital mix (i.e., the ratio of equity-to-debt) of the target, and develop a robust financial strategy to identify and maintain an optimal capital mix that will reflect the operating capacity and guarantee the sustainability of the business of the target post-acquisition. (ii) The tax strategy may need to be revisited, thereby developing a tax planning and tax optimisation framework(s) suitable for the target’s business. 37 Recommendation: The target company may be considered as a good buy based on the analysis of the financial statements as presented above and other essential factors. However, the Board will also have to ensure that observations raised, and probable strategies identified above are adopted on acquisition of the target company in order to achieve the synergy as expected by the Board to expand the company’s profitability and growth. Best regards Senior Accountant

Examiner’s report The question tests candidates’ knowledge of using ratios computed for interpretation and decision making purposes. Most of the candidates attempted the question and performance was fair. Candidates were able to calculate the cost of sales ratios but others cold not compute earnings yield which is simply the reciprocal of P/E ratios. Majority of the candidates could not write the technical report required for the evaluation and advise the board of directors of the company accordingly. Candidates should note that interpretation rather than mere computations of ratios is required at this level of Institute’s examinations for better performance, hence they should pay more attention to this area. 38

Marking guide Marks Marks a) Computation of ratios i) Computation of cost of sales ratios:

- Owerri PLC ½ - Warri Health PLC ½ ii) Computation of Earnings yield ratio:

- Owerri PLC ½ - Warri Health PLC ½ 2

b) Preparation of technical report:

- Presentation in memo format 1 - Introduction/preamble 1 - Evaluation of profitability 2 - Evaluation of liquidity 2 - Evaluation of gearing/stability 2 - Evaluation of investors return 2 - Correct recommendation 2 - Closing and signature 1 13 Total 15 39 ICAN/231/Q/B1 Examination No..................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA