Financial Reporting · 2023

a. (i) Adama PLC Statement of profit or loss and other comprehensive income for the year ended june 30, 2022

Note N'000 Revenue 1 2,073,569 Cost of sales 2 (1,038,553) Gross profit 1,035,016 Other income 3 88,436 Administrative expenses 4 (184,910) Distribution cost 5 (261,673) Impairment loss on financial assets 6 (12,700) Operating profit 664,169 Finance cost 7 (41,096) Profit before taxation 623,072 Income tax expenses 8 (30,330) Profit for the year 592,742 (ii) Adama PLC Statement of Changes in Equity for the year ended June 30, 2022 Ordinary share Share premium General reserve Rev reserve Foreign exchange reserve Retained earnings Total ₦'000 ₦'000 ₦'000 ₦'000 ₦'000 ₦'000 ₦'000 Balance b/f 590,000 142,000 109,809 80,500 47,108 231,572 1,153,881 Profit for the year - - - - - 592,742 592,742 Issue of shares 200,000 60,000 - - - - 260,000 Transfer to Reserve - - 38,900 - - (38,900) - Dividend paid - - - - - (119,880) (119,880) Balance to SOFP 790,000 202,000 148,709 80,500 47,108 665,534 1,933,851 12 (iii) Adama PLC Statement of Financial position as at June 30, 2022 Non-Current Asset: Note N'000 Property, plant & equipment 9 1,751,367 Financial assets 231,500 Intangibles 50,600 Total non-current assets 2,033,467 Current Assets: Inventory 622,812 Trade receivables 10 538,800 Bank balance 142,310 Total current asset 1,303,922 Total assets 3,337,389 Equity and liabilities: Equity: Ordinary shares of ₦0.50 each 790,000 Share premium 202,000 General reserve 148,709 Revaluation reserves on land and buildings 80,500 Foreign exchange reserve 47,108 Retained earnings 665,534 Total equity 1,933,851 Non-current liabilities: 3% Redeemable loan notes 11 869,333 Deferred tax provisions 12 12,520 Total non-currentliabilities 881,853 Current liabilities: Trade payables 353,846 Bank overdraft 49,950 Current tax payables 117,888 Total current liabilities 521,684 Total liabilities 1,403,537 Total equity and liabilities 3,337,389 13 Wk 1: Revenue ₦'000 Balance b/f 2,142,819 Proceeds on disposal (69,250) Statement of profit or loss (SOPL) 2,073,569 Wk 2: Cost of sales ₦'000 Balance b/f 995,003 Depreciation on building (65% x (798,800/25yrs) 20,769 Capitalised cost of new office equipment (82,600) Depreciation on office equipment (Wk 4) 105,381 Balance to SOPL 1,038,553 Wk 3: Other incomes ₦'000 Investment incomes 65,246 Profit on disposal of office equipment ₦69,250 – 46,060) 23,190 Balance to SOPL 88,436 Wk 4: Administrative expenses ₦'000 Balance b/f 173,727 Depreciation on building (35% (798,800/25yrs) 11,183 Balance to SOPL 184,910

Workings: Wk 5: Distribution cost ₦'000 Balance b/f 161,128 Depreciation ondelivery van (Wk 9) 60,280 Irrecoverable debt (Wk 10) 26,450 Allowance for receivables (WK10) 13,815 Balance to SOPL 261,673 Wk 6: Financial assets ₦'000 Balance b/f 244,200 Impairment loss on financial assets (SOPL) (12,700) Balance c/f (SOFP) 231,500 Wk 7: Finance cost ₦'000 Interest on loan notes (W11) 41,096 Wk 8: Income tax expense ₦'000 Current year tax 143,552 Overprovision of previous year tax (25,664) Balance to SOFP 117,888 14 Decrease in deferred tax provision (100,078 – 12,520) (87,558) Balance to SOPL 30,330 Wk 9: Schedule of mmovement in PPE for the year ended June 20, 2022 Land Building O/equip Del. van Total Cost/valuation: ₦'000 ₦'000 ₦'000 ₦'000 ₦'000 Balance b/f 266,800 798,800 865,800 301,400 2,232,800 Additions - - 82,600 - 82,600 Disposal (75,000) (75,000) Balance c/f 266,800 798,800 873,400 301,400 2,240,400 Acc. depreciation: Balance b/f - - 199,800 120,560 320,360 Current year charges

- 31,952 105,381 60,280 197,613 Disposal (28,940) (28,940) Balance c/f - 31,952 276,241 180,840 489,033 Carrying amount: Balance c/f 266,800 766,848 597,159 120,560 1,751,367 Balance b/f 266,800 798,800 666,000 180,840 1,912,440 WK 10: Trade receivables N’000 Balance b/f 579,065 Irrecoverable debt (26,450) Allowance for receivables (₦579,065 - 26,450 x 2 ½ %) (13,815) Balance to SOFP 538,800 Wk 11: 3% Redeemable loan notes N’000 Balance b/f 843,000 Interest on loan notes (14,763) Effective interest rate (843,000 x 9/12 x 6.5%) 41,096 SOFP 869,333 Wk 12: Deferred tax liabilities N’000 Closing deferred tax provision 12,520 Opening deferred tax provision (100,078) Decrease in deferred tax provision (87,558) Wk 13: Proposed ordinary dividend The directors recommended a 20 kobo final dividend per ordinary share for the year. 15

(b) Internal Memo To: Finance Director From: Chief Accountant Subject: Understanding Earnings Per Share (EPS) and Return On Capital Employed (ROCE) Date: May 16, 2023 Above subject refers. Following your request, I have prepared a brief on the financial ratios Earnings Per Share (EPS) and Return on Capital Employed (ROCE). Earnings Per Share (EPS): Earnings are profits available for equity holder. Earnings per share is a measure of the amount of earnings in a financial period for each equity share. It is calculated by dividing net earnings(profit) by the number of ordinary shares outstanding. It is a useful measure for shareholders as it indicates the profitability available for each share they hold. It is used by investors as a measure of the performance of companies in which they invest or wish to invest. Limitations of EPS:

i. Not all entities use the same accounting policies. It may not always be possible to make meaningful comparison between EPS of different companies.

ii. EPS does not take account of inflation, so that, growth in EPS over time might be misleading.

iii. EPS measures an entity\`s profitability, but this is only part of an entity\`s overall performance.

iv. It can be manipulated by changing the number of shares through stock splits or buybacks.

v. EPS is not useful for companies with no earnings or negative earnings.

vi. Diluted EPS is based on current and not on forecast earnings, therefore not a reliable predictor of future EPS.

vii. The use of EPS as the main measure of an entity’s performance encourages management to make decisions which increase EPS in short run but damage the entity in the longer-term. That is encourages creative accounting. Return on Capital Employed (ROCE): ROCE is a profitability ratio that measures how effectively a company can generate profits from its capital employed by comparing net operating profit to capital employed. It is calculated by dividing earnings before interest and 16 tax (EBIT) by the total capital employed (shareholder's equity + non-current liabilities). Limitations of ROCE:

i. ROCE does not take into account the uniqueness of the methodology of depreciation of assets and the life cycle of the assets,thus, two companies with similar ROCE may have different risk profiles if one has older assets compared to the other. ii. It uses operating profit which can be subject to different accounting treatments and manipulations. iii. It does not consider the financing structure of a company. A company with high debt may show a high ROCE, even though it might be at a higher risk. iv. Like all ratios, it needs to be compared to industry average or the company's past performance for meaningful analysis. v. Definition of capital employed varies and confusion may arise when the return on capital is discussed unless terms are rationalised. vi. The return on capital is a misleading guide to efficiency unless assets are valued at current prices. Profit is counted in terms of current prices so it will be misleading if they are compared with capital computed on historic basis. While both EPS and ROCE provide important insights into a company's financial performance, they should not be used in isolation. A comprehensive financial analysis should use a combination of financial ratios that considers liquidity, solvency, profitability, and efficiency. I hope this brief provides a balanced view of these ratios. Thank you _______________ Chief Accountant

Examiner’s report The question tests candidates’ knowledge of preparation of final accounts , part ’a ’ requires presentation of statement of profit or loss and other comprehensive income, statement of changes in equity and state and statement of financial position. Part ’ b’ is on explanation of Return on Capital Employed ( ROCE) and Earnings Per Share (EPS). Most candidates attempted the questions and performance was below average. The common pitfalls were the inability of some candidates to determine the impairment loss on financial assets and to correctly calculate retained earnings while others could not prepare the non-current assets schedule. Also some 17 candidates were unable to state limitations of ROCE and EPS as a tool of financial analysis. Candidates’ are advised to pay attention to all areas of the syllabus and make use of ICAN pathfinder and study text for better performance in future examinations.

Marking guide Marks Marks a. i) Preparation of statement of profit or loss and other comprehensive income - Title of the financial statement ¼ - Determination of revenue 1 - Determination of cost of sales 1 ¾ - Determination of gross profit 1 ½ - Determination of administrative expenses 1 ½ - Determination of distribution costs 1 ½ - Stating of profit before taxation ½ - Calculation of income tax expense 1 ½ - Stating of profit for the year ½ 10

ii) Preparation of statements of changes in equity

- Title of the financial statement ¼ - Determination of ordinary share capital ½ - Determination of share premium ½ - Determination of general reserve ½ - Determination of revaluation reserve ½ - Determination of foreign exchange reserve ½ - Determination of retained earnings ¾ - Determination of total equity ½ 4

iii) Preparation of statement of financial position

- Title of the financial statement ¼ - Determination of non-current assets 4 - Determination of current assets 2 - Stating of total assets ¼ - Determination of equity 1½ - Determination of non-current liabilities ¾ - Determination of current liabilities 1 - Stating of total equity and liabilities ¼ 10

b) Preparation of internal memo

- Presentation in memo format ½ - Explanation of EPS ½ - Explanation of ROCE ½ - Stating 2 correct limitations of EPS 2 18

- Stating 2 correct limitations of ROCE 2 - Conclusion/Closing ½ 6 Total 30

(a) Users of financial information and their need. Financial statements meet the common needs of most users as individual primary users have different information needs. The users include:

i. Shareholders or investors These are the providers of risk capital. They need information on the entity’s financial performance and financial position which help them to assess it's cash generation abilities and financial stability. They are very concerned about the risk inherent in and the returns provided by their investments in the entity; ii. Government Governments and their agencies require information in order to regulate the activities of entities, assess taxation and provide a basis for national statistics to be used in allocating resources; iii. Employees Employees are interested in information that helps them to assess the ability of their employer to provide remuneration, employment opportunities, and guaranteed retirement benefits. That is information about the stability and profitability of their employer and their long-term employment prospects; iv. Suppliers Suppliers and other trade payables are interested in information that enables them to assess the ability of the entity to make payments when the obligation becomes due. That is, information that will enable them to decide whether to sell on credit to the entity; v. Customers Customers are interested in information that will confirm the going concern status of the entity. This is so especially where they rely on the entity for special products or materials essential to their own existence; vi. Lenders Lenders are interested in the information which will help them to determine whether their loans and interest thereof will be repaid at the repayment date. That is, information about the short- and long-term liquidity or solvency of the entity. Potential Lenders also seek such information to enable them to decide whether to lend or not to the entity; vii. Public The general public is invested in information about trends and recent developments in the entity’s prosperity and range of its activities so as to confirm whether the entity will continue to meet its social responsibility to its immediate community or the general public; and 19

viii. Regulators Regulators are interested in information that will confirm the entity’s compliance with relevant regulations, ilegislation and accounting standards guiding the entity’s operation and reporting.

(b) Content of director’s report – CAMA 2020 Every company must prepare a director’s report which must contain the following: i. A fair view of the development of the business of the company and its subsidiaries during the year and of their position at the end of it; ii. The amount (if any) which the directors recommend should be paid as dividend and the amount (if any) which they propose to transfer to reserves; iii. The names of the persons who were directors of the company at any time during the year; iv. The financial activities of the company and its subsidiaries in the course of the year and any significant change in those activities during the year; v. Particulars of significant change (if any) in the non-current assets of the company in the financial year; vi. The difference between the market value of land and the amount at which it is recognised in the statement of financial position if in directors’ opinion, the difference is of such significance that the attention of members or loan notes holders; vii. Details of directors in the company’s shares and notes holders; viii. Particulars of any important events affecting the company, which has occurred since the end of the year; ix. An indication of likely future developments in the business; x. An indication of the activities (if any) of the company in the field of research and development; xi. Names of distributors of the company’s product; and xii. Particulars of donations and gifts made for any purposes.

(c) Babanriga Nigeria Limited Computation of deferred tax charge/credit for the year ended December 31, 2021 Date Details Carrying amount Tax base Temporary difference Tax rate Deferred tax ₦'000 ₦'000 ₦'000 % ₦'000 1/1/2019 Cost 10,000 10,000 - 30% - 31/12/2019 Depreciation (800) (4,000) 3,200 30% 960 31/12/2019 Tax base 9,200 6,000 3,200 30% 960 31/12/2020 Depreciation (800) (1,500) 700 30% 210 20 31/12/2020 Tax base 8,400 4,500 3,900 30% 1,170 31/12/2021 Depreciation (800) (1,125) 325 30% 98 31/12/2021 Tax base 7,600 3,375 4,225 30% 1,268 In Summary: The deferred tax charges to be recognised in the statement of profit or loss and other comprehensive income will be ₦98,000. The deferred tax balance to be shown in the statement of financial position will be ₦1,268,000.

Examiner’s report The question tests candidates’ knowledge of information needs of different users of financial statements and contents of directors reports in accordance with the provisions of CAMA 2020 in parts a and b of the question, while part c requires the computation of deferred tax to be charged to statement of profit or loss and amount to be disclosed in the statement of financial position. Most of the candidates attempted the questions and performance was above average. Candidates performed well in parts a and b of the question but could not correctly calculate the deferred tax in the part c and this led to loss of marks. Deferred tax has been favourite area of the examiners at this level of the institute examination, hence candidates are advised to pay attention to this area of the syllabus for better performance in future examinations.

Marking guide Marks Marks a) Conceptual Framework

- Identification of five users of financial statements at ½ marks each 2½ - Explanation of the information needs of the five users of financial statement at 1 ½ marks each 7½ 10

b) Content of director’s report-CAMA 2020

- Ten points at 1 mark each 10 Total 20 21

a. Olu Nigeria PLC Consolidated statement of profit or loss and other comprehensive income for the year ended September 30, 2022 ₦'000 Revenue (446,250 + (233,100 x 9/12) - 40,000) 581,075.00 Cost of sales (330,750 + (174,600 x 9/12) - 40,000 + 6,000 + 4,500) (432,200.00) Gross profit 148,875.00 Other income (40,250 - 6,550 - 10,000) 23,700.00 Distribution cost (10,250 + 11,100 x 9/12) (18,575.00) Administrative expenses (31,650 + (14,760 x 9/12) + 28,000 - 10,000) (60,720.00) Finance cost (8,575 + (7,200 x 9/12) - 6,550) (7,425.00) Profit before taxation 85,855.00 Income tax expenses (28,670 + 5,790 x 9/12) (33,012.50) Profit for the year 52,842.50 Other comprehensive income: Gain on revaluation (26,600 + 5,000) 31,600.00 Total comprehensive income 84,442.50 Profit attributable to: Owners of parent (bal. figure) 55,006.25 Non-controlling interest (Wk 4) (2,163.75) 84,442.50 Total comprehensive income attributable to: Owners of parent (Bal. Figure) 85,106.25 Non-Controlling Interest (Wk 4) (663.75) 84,442.50 Working Notes Wk 1: Group Structure Olu PLC ------------ 70% --------------- Oba LTD NCI ------------------- 30% Wk 2: Unrealised profit URP = 40,000,000 x 25/125 x 3/4 = N6,000,000 Wk 3: Excess depreciation 30,000,000/5 x 9/12 = N4,500,000 Wk 4: Share of subsidiary's profit ₦'000 For the year (19,650 x 9/12) 14,737.50 Impairment losses (28,000.00) Management fee 10,000.00 Interest paid 6,550.00 22 Unrealised profit (Wk 2) (6,000.00) Excess depreciation (4,500.00) Revised profit for the year (7,212.50) Other comprehensive income: 5,000.00 Total comprehensive income (2,212.50) NCI at 30%: Profit for the year (2,163.75) Total comprehensive income (663.75) b i. Computation of goodwill on acquisition ₦'000 ₦'000 Purchase consideration (70% x 40,000 x 3/5 x N8.10) 136,080.00 Fair value of non-controlling interest (30% x 40,000 x N5.05) 60,600.00 Total Purchase consideration 196,680.00 Net Identified asset: Share capital of subsidiary 40,000.00 Retained earnings at acquisition (50,550 - (19,650 x 9/12) 35,812.50 Fair value adjustment (Plant) 30,000.00 Net asset acquired (105,812.50) Non-controlling interest (Wk 4) 90,867.50 Less Impairment 28,000 Goodwill 62,867.50

ii. Computation of non-controlling interest at reporting date ₦'000 Fair value of non-controlling interest (30% x 40,000 x N5.05) 60,600.00 Share of profit/loss (2,163.75) Share of revaluation surplus (₦5m x 30%) _1,500.00 NCI at reporting date 59,936.25 23

c. Exceptions to the rule of a parent company preparing consolidated financial statements. IFRS 10 provides that a parent need not present consolidated financial statements if (and only if) all the following conditions apply: i. The parent itself (X) is a wholly owned subsidiary, with its own parent(Y). Alternatively, the parent (X) is a partially owned subsidiary, with its own parent (Y), and the other owners of X are prepared to allow it to avoid preparing consolidated financial statements; ii. The parent’s debt or equity instruments are not traded in a public market; iii. The parent does not file its financial statements with a securities commission for the purpose of issuing financial instruments in a public market; and iv. The parent’s own parent, or the ultimate parent company (for example, the parent of the parent’s parent), does produce consolidated financial statements for public use that comply with IFRS.

Examiner’s report Parts ’a’ and \`b’ of the question test candidates’ ability to prepare consolidated statement of profit or loss and other comprehensive income while that part \`c’ is on exception rules on why a parent may be excluded from preparing consolidated financial statement. Few candidates attempted the questions and performance was below average. Most candidates could not correctly calculate the goodwill and non -controlling interest in part \`b ’ of the question. Candidates are advised to pay more attention to preparation of group accounts and relevant IFRS on group accounts for better performance.

Marking guide a Marks Marks

a) Preparation of consolidated statement of profit and loss and other comprehensive income - Stating title of the consolidated financial statement ¼ - Determination of consolidated revenue 1 - Determination of consolidated cost of sales 1 ½ - Stating of consolidated gross profit ¼ - Determination of consolidated distribution cost ¾

- Determination of consolidated administrative expenses 1 ¼ - Determination of consolidated finance costs 1 24

- Stating the consolidated profit before taxation ¼

- Determination of consolidated income tax expenses ¾ - Stating the consolidated profit for the year ¼ - Determination of gains on revaluation ¾ - Stating total comprehensive income ¼ - Determination of profit for the year attributable to owner’s of parent ¼ - Determination of profit for the year attributable to non-controlling interest 1 ½

- Determination of total comprehensive income attributable to owner of parent ¼ - Determination of total comprehensive income attributable to non-controlling interest 1¾ 12

bi) Calculation of goodwill on acquisition

- Determination of purchase consideration ¾ - Determination of fair value of non- controlling interest ¾ - Determination of pre-acquisition retained earnings ½ - Stating fair value adjustment for plant ¼ - Stating subsidiary’s net asset acquired ¼ - Stating impairment of goodwill ¼ - Stating goodwill on acquisition ¼ ii) Computation of non-controlling Interest

- Stating fair value of non-controlling interest at acquisition date ¼ - Stating share of post-acquisition profit or loss ¼

- Stating share of revaluation reserve ¼ - Stating NCI at reporting date ¼ 4 c) - Exception to preparation of consolidated financial statements by IFRS 10 - Exceptions to preparation of consolidated financial statement 4 Total 20 25

(a) Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base Temporary differences may be either: i. Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or ii. Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. (b) The major components of tax expense or income to be disclosed may include:

i. Current tax expense or income; ii. Any adjustments recognised in the period for current tax of prior periods; iii. The amount of deferred tax expense or income relating to the origination and reversal of temporary differences; iv. The amount of deferred tax expense or income relating to changes in tax rates or the imposition of new taxes; v. The amount of the benefit from a previously unrecognised tax loss, tax credit; or temporary difference of a prior period that is used to reduce deferred tax expense; vi. Deferred tax expense arising from the write-down, or reversal of a previous write-down of a deferred tax asset; and vii. The amount of tax expense or income relating to those changes in accounting policies and errors that are included in profit or loss in accordance with IAS 8, because they cannot be accounted for retrospectively. 26

c. i) Buga Nigeria Limited Tax computation and current tax expense for the year September 30, 2022 ₦'000 ₦'000 Accounting profit before taxation 196,800 Add: Depreciation on freehold property 26,300 Depreciation of office equipment 28,250 Increase in provision for doubtful debts 16,750 Accrued interest 10,850 Fine payable 32,500 114,650 Less: Interest income 3,250 Tax allowable depreciation on freehold proper 94,600 Tax allowable depreciation on office equipment 22,500 (120,350) Taxable Profit 191,100 Tax at 30% 57,330

(ii) Deferred tax liability as at September 30, 2022 Carrying amount Tax base Temporary difference ₦'000 ₦'000 ₦'000 Freehold property 236,700 168,400 68,300 Office equipment 205,000 182,500 22,500 Trade receivables 174,250 191,000 (16,750) Interest receivables 3,250 - 3,250 Fines payable (32,500) (32,500) - Interest payables (10,850) - (10,850) 66,450 Deferred tax at 30% 19,935 Temporary difference Deferred tax at 30% Deferred tax liabilities 94,050 28,215 Deferred tax assets (27,600) (8,280) Deferred tax 66,450 19,935 27

(iii) Movement on the deferred tax account for the year ended Sept. 30, 2022 ₦'000 Deferred tax as at October 1, 2021 8,100 Statement of profit or loss (balancing figure) 11,835 Deferred tax as at September 30, 2022 19,935

Examiner’s report The question is on IAS 12 Income Tax with particular emphasis on deferred taxation computation and disclosure requirements. Most candidates did not attempt the question and the few that attempted it performed badly. This is an indication that most candidates avoid this area of institute’s syllabus, hence the poor performance. Candidates are advised to pay more attention to this area of the syllabus for better performance in future examinations.

Marking guide Marks Marks a. Explanation and types of “temporary difference” - Explanation of temporary difference 1 - Discussion of two types of temporary difference 2 3

b. Stating five components of tax expenses or income 5

c. i) Preparation of tax computation and current tax expense - Stating of accounting profit before tax ½ - Adjustment for depreciation of freehold property ½

- Adjustment for depreciation of office equipment ½

- Adjustment for increase in allowance for doubtful debts ½ - Adjustment for accrued interest ½ - Adjustment for fine payable ½ - Adjustment of interest income ½ - Deduction of tax allowable depreciation on freehold property ½ 28

- Deduction of tax allowable depreciation on office equipment ½ - Stating of total taxable profit ½ - Calculation of current tax expense ½ - Any 8 items at ½ mark each 4

ii) Calculation deferred tax Liability

- Determination of carrying amounts 1 ¾ - Determination of tax base 1 ¼ - Determination of temporary difference 2 - Calculation of deferred tax 1 6

iii) Movement on the deferred tax account

- Title of statement ½ - Stating opening deferred tax balance ½ - Stating deferred tax changed to profit or loss ½

- Stating closing deferred tax income ½ 2 Total 20

a i) A financial asset is any asset that is:

• Cash;

• an equity instrument of another entity; and

• a contractual right to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity. A financial liability on the other hand is any liability that is a contractual obligation:

• to deliver cash or another financial asset to another entity.

• to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.

ii) Financial assets must be classified into one of three categories on initial recognition. The three categories are:

i) Financial assets at amortised cost A financial asset is measured at amortised cost if both of the following conditions are met:

• the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and

• the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest 29 on the principal amount outstanding. Examples include loans, trade receivables and held-to-maturity bonds.

ii) Financial assets at fair value through other comprehensive income FVTOCI) A financial asset is measured at fair value through OCI if both of the following conditions are met:

• the asset is held within a business model whose objective is achieved by both holding and collecting contractual cash flows and selling the financial assets; and

• the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Examples include ordinary share

iii) Financial assets at fair value through profit or loss (FTVPL) Any financial assets that do not meet the criteria for measurement at amortised cost or FVTOCI are measured at FVTPL. An entity may, at initial recognition, irrevocably designate a financial asset as measured at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency. Examples include derivatives, equity investments unless the entity has elected to present changes in fair value in other comprehensive income. Loans and receivables that fail the amortised cost or FVTOCI criteria, or other securities that are held for trading. Olisa Nigeria PLC Computation of amortised cost of the bond at the end of each year Year ended Amortised cost b/f Interest at 5.94234% Cashflows Amortized cost c/f ₦ ₦ ₦ ₦ 2018 10,000,000 594,234 500,000 10,094,234 2019 10,094,234 599,834 500,000 10,194,068 2020 10,194,068 605,766 700,000 10,099,834 2021 10,099,834 600,166 700,000 10,000,000 30

Examiner’s report The question tests candidates’ knowledge of the provisions of IAS 9 – Financial Instruments, part\` a’ of the question is on explanation and description of various categories of financial assets while part \` b’ is on calculation of amortised cost of bonds. Few candidates attempted the question and performance was below average Some of the candidates were able to explain different categories of financial assets but majority of them could not calculate armortised cost of bonds. Candidates are advised to pay attention to both qualitative and quantitative aspects of financial instruments sections of the syllabus for better performance in future.

Marking guide Marks Marks a i) Explanation of financial asset and financial liability

- Explanation of financial assets 1½ - Explanation of financial liability 1½ 3

ii) Description and categories of financial assets:

- Stating three categories of financial assets 1½ - Description of financial assets at amortised cost 1 - Example of financial asset at amortised cost ½ - Description of financial asset at fairvalue through other comprehensive income (FVTOCI) 1 - Example of financial asset at FVTOCI ½ - Description of financial asset at fair value through profit or loss (FVTPL) 1 - Examples of financial asset at (FVTPL) 1½ 7

b) Calculation of the amortised cost of bond

- Title of calculation ¼ 5 - Determination of amortised cost b/f 1¼ - Determination of yearly interests 1¼ - Determination of cashflows 1 - Determination of amortised cost c/f 1¼ Total 15 31

a.i) Perpetual inventory system This is a system where inventory records are continuously updated so that inventory values are always available. A single account is used to record all inventory movements. The account is used to record purchases in the period and inventory is brought down on the account at each year-end. The account is also used to record all issues out of inventory. All transactions involving the receipt or issue of inventory must be recorded and at any time, the balance on the inventory account should be the value of inventory currently held. The following are the possible cause of differences between the balance on the inventory account and the physical inventory counted:

• Theft of inventory;

• Damage to inventory with failure to record that damage;

• Mis-posting of inventory receipts or issues (for example posting component A as component B);

• Failure to record a receipt; and

• Failure to record an issue.

ii) Disclosure requirements for inventory IAS 2 requires the following disclosures in the notes to the financial statements:

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

• The total carrying amount of inventories, is 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 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;

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

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

d. Block-Chain Technology is one of the new technologies that became popular globally through the advancements in digital currency transactions such as Bitcoin. It is used by many businesses to record their financial and non-financial transactions in an open secured and decentralised ledger. It also makes the transaction records accessible to authorised users at any time and at any location. 32 The following are the disadvantages of adopting the block-chains technology:

• High implementation cost: Blockchain is costlier compared to a traditional database. Additionally, businesses need proper planning and execution to integrate blockchain into their process;

• Data modification. Blockchain technology does not allow easy modification of data once recorded, and it requires rewriting the codes in all of the blocks, which is time-consuming and expensive. The downside of this feature is that it is hard to correct a mistake or make any necessary adjustments;

• Scalability issues: Blockchain networks, especially public ones, often face problems with scalability. As the number of transactions increases, the size of the blockchain grows, and more computational power is required to process new transactions, making the system slower over time;

• Energy consumption: Blockchain networks, particularly those that use proof-ofwork consensus mechanisms like Bitcoin, consume large amounts of energy. This is because the computers or 'nodes' in the network need to solve complex mathematical problems to add a new block to the chain, which requires substantial computational power;

• Regulatory and legal challenges: The decentralised nature of blockchain poses regulatory and legal challenges. It can be difficult to apply traditional legal frameworks to blockchain transactions, especially when they cross jurisdictions. Moreover, issues related to privacy and data protection can emerge, given that information stored on the blockchain is transparent and immutable;

• Adoption and interoperability: For blockchain to reach its full potential, widespread adoption is necessary. However, different blockchains are often not compatible with each other, and existing systems and infrastructure may need significant changes to accommodate blockchain technology;

• Potential for misuse: Although blockchain's security features can help prevent fraud, the technology can also be used for illicit activities. For example, crypto currencies that uses blockchain technology have been used for money laundering due to the potential anonymity they can provide;

• Thorough knowledge or expert: It's challenging to implement and manage a Blockchain project. To complete the process, the business must have in-depth expertise. One of the disadvantages of Blockchain is that it necessitates hiring numerous experts in the sector, which creates a problem.

• Inefficiency: It is inefficient to have several network users validating the same operation, since only one will receive the record derived from the mining process. That is, some blockchains are sometimes inefficient due to how they operate.

• Unemployment: As blockchain technology is adopted and implemented, all the intermediation sectors for the validation of payments and process 33 will necessarily be reduced to the point of disappearing and with it the jobs required for it will disappear, and

• Security: Blockchains are not completely secured.

Examiner’s report The question tests candidates’ knowledge of IAS 2 - Inventories and Block -Chain Technology. Most of the candidates attempted part \`a’ of the question on Inventory while only few of them attempted part \`b ’on Block – Chain Technology. Candidates’ performance was good in part \`a’ but poor in part \`b’. Inability of the candidates to pay special attention to information technology part of the syllabus led to loss of marks. Candidates are advised to pay more attention to all areas of the syllabus for better performance in future.

Marking guide Marks Marks a) i. Explanation of perpetual inventory system and cause of difference in balance - Explanation of perpetual inventory system 2½ - Stating five cause of differences between balance in inventory account and physical count 2½ 5

ii. Disclosure requirements for Inventory

- Five correct disclosure of inventory 5

b) Block-Chain Technology

- Explanation of block-chains 2 - Stating three disadvantages of adopting block-chain 3 5 Total 15

(a) Qualitative characteristics of General-Purpose Financial Statements are: 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. 34 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;

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;

iii. 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;

iv. 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; 35

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

vi. 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: i. Cost model - Property, plant and equipment are carried at cost less any accumulated depreciation and any accumulated impairment losses; and ii. Revaluation model - Property, plant and equipment are 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 candidates’ knowledge of Conceptual Framework of Financial Reporting and methods of valuation of property plant and equipment in accordance with IAS 16. Most of the candidates attempted the question and performance was good. Candidates are advised to pay more attention to all relevant International Financial Reporting Standards (IFRS) at this level of the Institute\`s examination for better performance in future.

Marking guide Marks Marks a) Identification and explanation of qualitative characteristics of general Purpose Financial Statements - Stating five qualitative characteristics 2½ - Explanation of the five qualitative characteristics 7½ 10

b) Methods of valuation of PPE

- Stating two methods of valuation 2 - Explanation of the two methods 3 5 Total 15 36 ICAN/232/Q/B1 Examination No..................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

a. Akamata Nigeria Limited Statement of profit or loss and other comprehensive income for the year ended March 31, 2023

Note N'000 Revenue 624,500 Cost of sales 1(b) (470,998) Gross profit 153,502 Administrative expenses 2 (87,675) Distribution cost (45,300) Restructuring cost (605) Operating profit 19,922 Interest received 6,000 Interest expense 3 (6,388) Profit before taxation 19,534 Income tax expense (4,880) Profit for the year 14,654 Other Comprehensive Income: Gain on revaluation of land (120,000 – 100,000) 20,000 Total comprehensive income 34,654 Akamata Nigeria Limited Statement of changes in equity for the year ended March 31, 2023 Ordinary share Share premium Revaluation surplus Retained earnings TOTAL N'000 N'000 N'000 N'000 N'000 Balance b/f 100,000 2,150 15,625 140,385 258,160 Profit for the year - - - 14,654 14,654 Issue of shares 10,000 2,000 - - 12,000 Gain on revaluation - - 20,000 - 20,000 Dividend paid _______ _______ ______ (5,000) (5,000) Balance to SOFP 110,000 4,150__ 35,625 150,039 299,814 12

Notes to the accounts Wk1: (a) Valuation of closing inventories N'000 N'000 N'000 Balance b/f 25,900 Less: Written down: Cost 250 Net realisable value: Expected selling price 275 Further cost to enable sales (100) 175 Amount written down 75 Balance c/f (SOFP) 25,825 Wk1 (b): Cost of sales N'000 Opening inventories 24,260 Cost of goods manufactured 470,000 Closing inventories (WKI) (25,825) Depreciation on P/Equip (25% x 10,250,000) 2,563 SOPL 470,998 Wk 2: Administrative expenses N'000 Balance b/f 80,100 Depreciation on building 7,575 SOPL 87,675 Wk 3: Interest expense N'000 Balance b/f 3,195 Accrued interest (91,250,000 x 7% x 6/12) 3,194 SOPL 6,389 13

b. Akamata Nigeria Limited Statement of financial position as at March 31, 2023 Non-current assets: Note N'000 Property, plant and equipment (PPE) 4 241,313 Investment properties (at market value) 120,000 Total non-current assets 361,313 Current assets: Inventory 1(a) 25,825 Trade receivables 46,650 Cash and bank 5,950 Total current assets 78,425 Total assets 439,738 Equity and liabilities: Equity: Ordinary shares of N1 each 110,000 Share premium 4,150 Revaluation reserves on land 35,625 Retained earnings 150,039 Total equity 299,814 Non-current liabilities: 7% Loan notes (repayable in 2027) 91,250 Current liabilities: Trade payables 40,600 Accrued interest expenses 3 3,194 Current tax payables 4,880 Total current liabilities 48,674 Total liabilities 139,924 Total equity and liabilities 439,738 Wk 4 Schedule of movement in PPE for the year ended March 31, 2023 Land Building P/Equip Total Cost/valuation N’000 N’000 N’000 N’000 Balance b/f 100,000 151,500 18,600 270,100 Revaluation 20,000 _______ ______ 20,000 Balance c/f 120,000 151,500 18,600 290,100 Acc. depreciation: Bal b/f - 30,300 8,350 38,650 Current year charges ____-___ 7,575 2,563 10,138 Balance c/f ____-___ 37,875 10,913 48,788 Carrying amount: Balance c/f 120,000 113,625 7,688 241,313 Balance b/f 100,000 121,200 10,250 231,450 14 Wk 5 Share issued; Since the proceeds were recorded separately in the trial balance. This requires a transfer to the appropriate accounts as follow; N’000 N’000 DR. Proceeds of shares 12,000 CR. Share capital (N10,000 x N1) 10,000 CR. Share premium (10,000 x N0.20) ________ 2,000 12,000 12,000 Motivating factors The following are some of the factors that may motivate the managing director to act unethically:

• The desire for personal gain: The MD maybe motivated to try to impress the board of directors that, he is a performing director;

• The pressure to meet certain goals or targets: It is possible that during the interview for his employment by Akamata Nig. Ltd he has promised the panel that he will ensure, the company is registered with NGX within a short period of time;

• A lack of awareness of the consequences of his actions; and

• Outright lack of ethical values: The MD may be planning to acquire controlling interest at a price which is not at arm’s length. Actions to consider

i. The MD should be made aware of the issues involved, including the potential professional and legal issues. The requirement of the relevant accounting standards should also be explained to him. ii. It may be appropriate to discuss and explain the situation with other members of the board of directors and seek their opinions. They may be able to add support to convince the MD that rules and regulations should not be bent to achieve the registration of the company with NGX. iii. If the MD continues to dominate and exert influence to force his way through, then it would be appropriate to consider the ethical implications of such action. iv. The MD could also be advised to do the right thing even if it involves extending or delaying the registration to ensure all the conditions are met without bending the rules and regulations. v. The approach of the MD may also raise concern about his ethical approach to other business areas other than financial reporting. The ultimate domineering approach of the MD may even lead to conclusion by the accountant to look for other employment. 15

Examiner’s report The question tests candidates’ knowledge of the preparation of statement of profit or loss and other comprehensive income as well as statement of changes in equity in part a, while parts b and c require preparation of statement of financial position and application of ethical issues respectively. Majority of the candidates attempted the question and performance was average. The common pitfalls include:

• Inability to correctly determine the value of closing inventory and calculate the cost of sales.

• Some candidates could not prepare the schedule of movement of property, plant and equipment.

• While others could not clearly state the motivating factors for the ethical pressure mounted by the MD of Akamata Nigeria Ltd. and actions to be considered as result of the pressure. Candidates are advised to pay more attention to this area of the syllabus particularly as it relates to the application of relevant accounting standards required for the preparation of final accounts of limited liability companies. Efforts should also be made to get familiar with the principles and application of ethical issues in financial reporting. 16

Marking guide Marks Marks a. Presentation of statement of profit or loss and other comprehensive income:

• Correct title of the statement ¼

• Stating the revenue ¼

• Determination of cost of sales 23/4

• Stating the gross profit ¼

• Determination of admin expenses 1

• Determination of interest expense 11/2

• Determination of profit before taxation 11/4

• Stating income tax expense ¼

• Stating profit for the year ¼

• Determination of total Comprehensive income 1 Presentation of statement of changes in equity:

• Correct title of statement ¼

• Determination of ordinary share capital 1

• Determination of share premium 1

• Calculation of revaluation surplus 1

• Determination of retained earnings 11/4

• Determination of total equity 13/4 15

b. Presentation of statement of financial position

• Correct title of the statement ¼

• Determination of non-current assets 51/2

• Determination of current assets 1

• Stating total assets ¼

• Determination of equity 11/4

• Stating non-current liabilities ¼

• Determination of current liabilities 1

• Determination of total equity and liabilities ½ 10

c. Identification of motivating factors and actions to be considered for unethical pressure

• Identifying any two motivating factors 2

• Stating any three correct actions to be considered 3 5 Total 30 17

Oyo wood’s adjusted ratios: On the assumption that after the purchase of Oyowood Ltd, the favourable effects of the transactions with other companies owned by the family would not occur, the following adjustments to the statement of profit or loss should be made: N’000 Cost of sales (45,000 / 0.9) (note 1) 50,000 Directors’ remuneration (note 2) 2,500 Loan interest (10,000 x 10%): (note 3) 1,000 These adjustments would give rise to a revised Statement of Profit or Loss below: Revenue 70,000 Cost of sales (note 1) (50,000) Gross profit 20,000 Operating cost (7,000) Directors’ remunerations (note 2) (2.500) Loan interest (note 3) (1,000) Profit before tax 9,500 Income tax expense (3,000) Profit for the year 6.500 In the statement of financial position: ₦’000 Equity would be the purchase price of Oyowood (per question) 30,000 The commercial loan (replacing the directors’ loan) would now be debt: 10,000 From these figures, the adjusted ratios are calculated as follows: Return on equity: (6,500 ÷30,000) x 100% 21.7% Net asset turnover: 70,000 ÷ (30,000 + 10,000) 1.75 times Gross profit margin: (20,000 ÷ 70,000 )x 100% 28.6% Net profit margin: (6,500 ÷ 70,000)x 100% 9.30% For Comparison: Oyowood Ltd adjusted Oyowood Ltd as reported Sector average Return on equity (ROE) 21.7% 47.1% 22.0% Net assets turnover 1.75 times 2.36 times 1.67 times Gross profit margin 28.6% 35.7% 30.0% Net profit margin 9.3% 20.0% 12.0% 18 Date: …………………. From: Financial Analyst To: Managing Director Subject: Comments on the performance of Oyowood Limited Dear Sir, Further to the request to carry out performance scorecard of the above company using accounting ratios to access the viability of its acquisition, the following findings have been made:

i. Profitability: Based on the financial statements provided, an analysis of Oyowood’s ratios reveals strong positions in relation to profitability, when compared to other businesses in the retail sector.

ii. Return on equity (ROE) Oyowood Ltd has a high ROE, which is a product of profit margins that are higher than average at both the gross and net profit levels.

iii. Net asset turnover: Oyowood Ltd also has a significantly higher net asset turnover. Therefore on the face of it, Oyowood Ltd achieved higher prices (or reduced cost of sales) hence:

• Oyowood Ltd has better control of overheads; and

• Oyowood Ltd is using its net assets more efficiently in terms of generating revenue.

iv. The positions however, changed when adjustments are made for the effect of Oyowood’s favourable transactions with other companies owned by the family.

• Gross profit margin: With purchases made at market prices, reported gross profit margin fell from 35.7% to 28.6%, which is below the sector average of 30%.

• Net profit margin: With purchases made at market prices, reported net profit margin fell from 20.0% to 9.3% which is below sector average of 12%.

• Return on equity (ROE): It would seem the existing directors of Oyowood Ltd are not charging commercial rates for their remunerations. When Chisom Plc replaces the board of Oyowood Ltd, it will have to increase the directors’ remunerations by ₦1.5million. Additionally, when the interest free directors’ loans are replaced with a commercial loan with interest charged at 10% per annum, this would reduce net profit by a further ₦1 million. The accumulation of these adjustments means that the ROE, which Chisom Plc should expect would be 21.7% rather than the reported 47.1% which is almost exactly in line with the sector average of 22%. 19

v. Net asset turnover: Net asset turnover falls from 2.36 times to 1.75 times, which is above, but much closer to the sector average of 1.67 times. This occurs when the asset turnover is calculated based on the equity purchase price and the commercial loan (equating to net assets). Conclusion: In summary, Oyowood’s adjusted results would still be slightly ahead of the sector averages in most areas, and may well justify the anticipated purchase price of N30 million. However, Oyowood Ltd will be no where near the excellently performing company suggested by the reported figures. Chisom Plc needs to exercise a degree of caution in its negotiations. Thanks Signed XYZ

Examiner’s report The question tests candidates’ knowledge of computation of ratios from an adjusted financial statements and the application of the ratios for the purpose of taking decisions on acquisition of a company. Few of the candidates attempted the question and their performance was below average. Majority of the candidates could not prepare the adjusted statement of profit or loss as well as the ratios required. Candidates are advised to make use of the ICAN Pathfinder and practice relevant questions on ratio analysis for better performance in future examinations of the Institute.

Marking guide Marks Marks a. Adjustment of financial statements and recalculation of ratios Presentation of revised statement of profit or loss 5 Presentation of revised statement of financial position extracts 1 Calculation of four ratios 4 10 b. Memo to the managing director commenting on financial performance Use of memo format 1 Stating appropriate subject/title 1 20 Comment on performance using relevant ratios 5 Conclusion 1 Recommendations 1 Closing memo format 1 10 Total 20

The circumstances that may lead to recognition or de-recognition of investment property under IAS 40 and its accounting entries is shown below: S/N Circumstance Recognition/De-recognition Accounting Treatment i. Commencement of owner occupied property Transfer from investment property to owner-occupied property.

• Where the fair value model for investment property is used: Revalue the property per IAS 40 (taking the gain or loss to the SOPL) and then transfer to property, plant and equipment at fair value.

• If the cost model is used for investment properties: The asset is transferred into property, plant and equipment at the current carrying amount and continues to be depreciated. ii. End of owner occupied property Transfer from owner-occupied property to investment property

• Where the fair value model for investment property is used: The asset must be revalued as per IAS 16 (creating a revaluation reserve in equity) and then transferred into investment property at fair value.

• If the cost model is used for investment Properties: The asset is transferred into investment properties at the current carrying amount and continues to be depreciated. 21 Transfer iii. Commencement of from investment development with property to inventories the view to sale Fair value at the date of change of use becomes the deemed cost for future accounting purposes iv. Commencement of a lease to another property Transfer from inventories to investment property Fair value at the date of the transfer and any difference compared to transfer, previous carrying amount is recognised in profit or loss

v. Development with a view to continue letting Development of investment property to be treated as investment property Continue to treat it as investment property

i. If Young Shall Grow uses cost model for its investment properties: When the building was owner-occupied, it was an item of property, plant and equipment. From December 31, 2017, the property was held to earn rental income and for capital appreciation so it should be reclassified as investment property in line with IAS 40. According to IAS 40, if owner-occupied property becomes investment property that will be carried at cost, it is transferred into Investment Properties at the current carrying amount i.e. at December 31, 2017, and continues to be depreciated. Carrying amount to be transferred is shown below: The carrying amount of N49,500 transferred to investment property will be depreciated for 5 years before the change in use to owner-occupied property and depreciation of N5,500 (N49,500/45yrs) x 5 will be recorded in the statement of profit or loss. On December 31, 2022, there is another change in use by Young Shall Grow from investment property to owner-occupied property. According to IAS 40, If the cost model is used for investment properties: The asset is transferred into owner-occupied property (PPE) at the current carrying amount and continues to be depreciated. Therefore, N44,000 (N49,500- N5,500) will be transferred to owner-occupied property and will be depreciated for the remaining 40 years i.e. (N44,000/40yrs) amounting to N1,100 annual depreciation recorded in the statement of profit or loss. N’000 Cost 55,000 Accumulated Depreciation (N55,000/50) x 5 (5,500) Carrying amount as at December 31, 2017 49,500 22

ii. If Young Shall Grow uses fair value model for its investment properties: When the building was owner-occupied, it was an item of property, plant and equipment. From December 31, 2017, the property was held to earn rental income and for capital appreciation so it should be reclassified as investment property in line with IAS 40. According to IAS 40, if owner-occupied property becomes investment property that will be carried at fair value, the asset must be revalued as per IAS 16 (creating a revaluation reserve in equity) and then transferred into investment property at fair value. This means that the building will be transferred at N60million as at December 31, 2017 and the gain of N10,500 (N60,000 – N49,500) will be recorded in other comprehensive income and held in a revaluation reserve within equity. See working below.

Note: Investment properties held at fair value are not depreciated. Also, Investment properties measured at fair value must be revalued each year end, with the gain or loss recorded in profit or loss. N’000 Cost 55,000 Accumulated depreciation (N55,000/50) x 5 (5,500) Carrying amount as at December 31, 2017 49,500 Revaluation surplus 10,500 Fair value as at December 31, 2017 60,000 On December 31, 2022, there is another change in use by Young Shall Grow from investment property to owner-occupied property. According to IAS 40, if the fair value model for investment property is used, revalue the property as per IAS 40 (taking the gain or loss to the SOPL) and then transfer to owner-occupied property (property, plant and equipment) at fair value. This means the building will be transferred to owner-occupied property at N75Million and the gain of N15million (N75m-N60m) will be recorded in the statement of profit or loss. 23

Examiner’s report The question tests candidate’s knowledge of the principles and application of IAS 40 – Investment Property. Part (a) of the question requires candidates to state the circumstances that may lead to recognition and de-recognition of investment property as well as relevant accounting treatments. Part (b) of the question tests the application of the accounting treatments. Few candidates attempted the question and performance was very poor. Most of the candidates that attempted the questions could not identify the circumstances that may lead to recognition and de-recognition of investment property. Others could not also apply the principles of IAS 40 to determine how changes in use of the property should be reflected in financial statements. Candidates should pay special attention to all relevant statement of accounting standards at this level of the Institute’s Examinations for better performance in future.

Marking guide Marks Marks a. Four circumstances for recognition or de- recognition of investment property Identification of any four circumstance 2 Accounting treatments for the four circumstances identified 6 8 b. Discussion of how changes of use are treated in the financial statements in accordance with IAS 40 Discussion based on cost model of valuing investment property and treatment of changes in use 6 Discussion based on fair value model of valuing investment property and treatment of changes in use 6 12 Total 20

a. Purpose of dilutive measures

• Diluted EPS act as warning sign for investors in that, it shows what EPS could become if all potential shares were actually in issue.

• The purpose of presenting diluted EPS is to reflect the maximum potential dilution of current basic EPS as if the dilution took place at the later of: ➢ The beginning of the current period (for comparatives); and 24 ➢ The date of issue of the potential ordinary shares (applicable only where potential ordinary shares have been issued in the current year of comparative year presented. Types of dilution There are effectively three (3) types of dilution:

i. Convertible instruments Earnings are adjusted positively to reflect saving in interest or dividends incurred net of tax and shares as are adjusted positively to reflect additional number of shares as a result of the conversion. Examples include convertible preference and convertible loan notes. The calculation entails adjusting basic earnings and the weighted average number of shares outstanding.

ii. Options to acquire ordinary shares The issue of these incentives to directors, senior staff or occasionally other parties will entail adjustments to the weighted average number of shares outstanding only. Earnings are not adjusted, shares are adjusted positively to reflect the number of shares that will be issued for no consideration as a result of being issued at below the market price.

iii. Contingently issuable shares These are ordinary share issuable for little or no consideration, upon the satisfaction of certain condition pursuant to a contingent share. The contingent event could be, for example:

• The maintenance of a specified level of earnings;

• The future market place of ordinary shares; and or

• The opening of additional distribution of outlets Contingently issuable shares are only included in the computation of diluted EPS if the condition are satisfied (that is the contingent events have occurred).

b. Basic Earning Per Share (EPS) for the year ended December 31, 2022 EPS = Earnings No of ordinary shares = 36,000 12,000 N3 per share 25 Diluted EPS for the year ended December 31, 2022 No of Shares Earnings EPS Basic EPS 12,000,000 36,000,000 N3 Dilution 4,000,000 x 30/100 1,200,000 Add back interest: 5% x N4,000,000 200,000 Tax at 30% (200,000 x 30%) _________ (60,000) 13,200,000 36,140,000 N2.74 Diluted EPS = 36,140,00 = N2.74 per share 13.2million

Note: The number of potential shares is calculated using the conversion rate of 30 shares for every N100 of loan notes, because this conversion rate produce more new shares than the other conversion rate of 25 shares for every 100 bonus. c If an alternative EPS figure is presented. IAS 33 states that:

i. A reconciliation must be shown between the earnings figure used in the alternative measure and the amount shown in the statement of profit or loss; ii. The alternative EPS must use the same weighted average number of shares as the IAS 33 calculations; iii. Basic and diluted EPS should both be disclosed with equal prominence; and iv. The alternative figure must only be shown in the notes and NOT on the face of the statement of profit or loss.

Examiner’s report The question tests the principles of accounting standards of IAS 33- Earnings Per Share (EPS) with particular emphasis on calculations of basic and diluted EPS. Candidates are also required to state the conditions under which alternative measures of EPS can be shown in the financial statements. Most of the candidates attempted the question and their performance was below average. Some candidates could not correctly calculate the EPS, while others could not state the conditions under which the alternative measure of EPS should be disclosed in the financial statements. Candidates are advised to pay more attention to all relevant accounting standards at this level of the Institute’s Examinations. 26

Marking guide Marks Marks a Explanation of purpose of dilutive measures and types of dilution: Stating two purpose of dilutive measures 2 Stating three (3) types of dilution 3 Explanation of three types of dilution 3 8 b Calculation of Earnings Per Share (EPS) Calculations of Basic Earnings per share 21/2 Calculation of Diluted Earnings per share 51/2 8 c Conditions to be complied with when alternative measures of EPS is shown in the Financial statement Two conditions correctly stated 4 Total 20

a. Definition of terms in line with IAS 12:

i. Deferred tax: This is the amount of tax payable or recoverable in future periods in respect of temporary differences, unused tax losses and unused tax credits. Deferred tax can either be deferred tax assets or deferred tax liabilities. It is not a tax levied by government that need to be paid. ii. Temporary differences: These are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either taxable temporary differences or deductible temporary differences. For example, temporary difference can arise as a result of differences in depreciation rate and capital allowance rate over the same period. iii. Permanent differences: These are differences between taxable profit and accounting profit that originate in one period and do not reverse in subsequent periods. They are the differences between book tax expense and the actual tax owed, which is caused by an item that does not reverse over time. Examples include Interest income on tax-exempt securities, fines and penalties paid to governments for violation of the law, etc. 27

b. Shakara Limited

i. Computation of tax payable for the year ended December 31, 2022 N'000 Profit before taxation 18,150 Add: Depreciation 1,650 Less: Capital allowances (2,250) Taxable profit 17,550 Tax rate 30% Income tax liability 5,265

ii. Computation of deferred tax balance at at December 31, 2022 Carrying amount: N’000 N’000 Cost (N7,200,000 + N1,800,000) 9,000 Less: Depreciation (1,650) 7,350 Tax base: Cost (N7,200,000 + N1,800,000) 9,000 Less: Capital allowances (2,250) 6,750 Taxable temporary difference 600 Tax rate 30% Deferred tax 180

iii. Computation of movement in deferred tax balance for the year N’000 Opening balance 1,200 Movement in the year 180 Closing balance 1,380

iv. Computation of income tax expenses for the year N’000 Current tax 5,265 Deferred tax 180 Income tax expense 5,445 28

Examiner’s report The question tests candidates’ knowledge of basic terminologies on deferred tax in accordance with IAS 12 and application of the principles to compute deferred tax. Most of the candidates attempted the question and their performance was average. Some candidates were unable to correctly explain the basic terminologies while others could not correctly compute the deferred tax as required by the examiner. Candidates are advised to pay attention to all sections of the syllabus for better performance in future examinations.

Marking guide Marks Marks a. Explanation of terms Explanation of deferred tax ½ Example of deferred tax 1/2 Explanation of temporary difference ½ Examples of temporary difference ½ Explanation of permanent difference ½ Example of permanent difference ½ 3

b. i. Correct calculation of company income tax liability for the year ended December 31, 2022 3 ii. Correct calculation of deferred tax balance at December 31, 2022 3 iii. Computation of movement in deferred tax balance charged to statement of profit or loss for year ended December 31, 2022 3 iv. Presentation of notes to income tax expense in the statement of profit or loss for the year ended December 31, 2022 3 12 Total 15

a. Creative accounting techniques that can be used by the management of an entity to manipulate the view given by the financial statements include:

i. Window dressing An entity enters into a transaction just before the year end and reverses the transaction just after the year end. For example, goods are sold on the understanding that they will be returned immediately after the year end. This appears to improve profits and liquidity. The only reason for the transaction is to artificially improve the view given by the financial statements; 29

ii. Off statement of financial position finance Transactions are deliberately arranged so as to enable an entity to keep significant assets and particularly liabilities out of the statement of financial position. This improves gearing and return on capital employed. Examples include sale or repurchase agreements and some forms of leasing;

iii. Changes in accounting policies or accounting estimates: An entity can revalue assets that is change from the cost model to the revaluation model) to improve gearing or change the way in which it depreciates assets in order to improve profits;

iv. Profit smoothing: This involves manipulating reported profits by recognising artificial assets or liabilities and releasing them to profit or loss as required;

v. Aggressive earnings management This is artificially improving earnings and profits by recognising sales revenue before it has been earned; and

vi. Capitalising expenses This is by recognising assets which do not meet the definition in the IASB Conceptual Framework or the recognition criteria. Examples include human resources, advertising expenditure and internally generated brand names.

b. Useful non-financial information would include the following: i. A description of the business, objectives and strategies of the entity; ii. A narrative review of the performance of the business during the period; iii. A description of the main risks and uncertainties facing the entity and the ways in which these risks are managed; iv. Details of any significant factors or events that may have an impact on the entity’s performance in future; v. Details of any significant factors or events that may have an impact on the entity’s cash flows in future; vi. Information about key relationships with other entities and transactions with related parties, including management; vii. A description of the entity’s research and development activities and of any material intangible assets, including internally generated intangible assets that have not been recognised in the statement of financial position; viii Additional explanations of amount included in the financial statements, where appropriate. For example, where these are based on estimates; and ix. Information about the entity’s policies in relation to environmental matters in relation to its employees and on social and community issues. 30

c. Areas of financial reporting that could be enhanced by the use of technology include:

i. Data collection The starting point of the financial reporting process is identification and collection of data from multiple sources within and outside the entity. Data identification and collation can actually be automated through the integration of the entity’s accounting software with the various data sources. It is equally possible to convert the unstructured and dirty data into a format and structure ready for entry into the accounting system with the help of some advanced technology tools.

ii. Data recording Once data is collated from various sources, the next course of action is to enter or record the data into the accounting system. Technology tool such as optical character recognition (OCR) has made it possible for organisations to capture and record data seamlessly with little or no human intervention. The data in source documents customer orders; invoices and delivery notes are captured through scanners or mobile device cameras and posted into the appropriate ledgers within the accounting system;

iii. Report preparation A well designed and automated accounting system will be able to aggregate all relevant information from individual ledger accounts to the general ledger which forms the basis of preparing the trial balance and ultimately, the financial statements and other products of financial reporting. Modern technology can enhance this process efficiently by replacing mechanistic human processing transactions and transforming the various data into proper accounting and management information, which ultimately feeds into a company’s annual reports;

iv. Report distribution Traditionally, annual reports of companies are published several months after the financial year end and sent to shareholders and other stakeholders through the postal or courier services. In recent times, many entities through the adoption of relevant technology tools have started hosting the annual reports on their websites or put them on CDS and sent to the stakeholders. Also there are instances where the soft copies of the annual reports are sent to each stakeholder’s e-mail address for downloading. In highly regulated sectors, such as the banking industry, the regulators could provide a web portal where each operator is required to submit the annual reports and other returns electronically; and 31

v. Report consumption Once the various stakeholders and investors receive the annual reports of an entity, they attempt to analyse and make useful meaning from them. Most institutional investors are already using technology to enhance effectiveness of investment analysis by extracting meaning and value, not only from company’s reporting, but from various sources of alternative data. Data analytic solutions can be used to perform detailed analysis of any company’s information for deeper insight that will aid decision making by investors.

Examiner’s report The question tests candidates’ knowledge of techniques of creative accounting, usefulness of non -financial information and areas of financial reporting that could be enhanced by the use of technology. Majority of the candidates attempted the question and their performance was above average. Most of them were able to identify and discuss the techniques of creative accounting and usefulness of non- financial information. However, they could not explain the areas of financial reporting that could be enhanced by use of technology. Candidates are advised to read accounting and financial journals to further enhance their knowledge of contemporary financial reporting issues for better performance in future examinations of the institute.

Marking guide Marks Marks a. Identification and discussion of techniques of creative accounting Identification of any four techniques of creative accounting 4 Discussion on four identified techniques of creative accounting 4 8 b. Useful non-financial information Stating three (3) non-financial information 3 c. Discussions on areas of financial reporting enhanced by technology Identification of two (2) areas of financial reporting enhanced by technology 1 Discussions of two (2) areas of financial reporting enhanced by technology 3 4 Total 15 32

a. Financial reporting and regulatory frameworks

i. The main sources of regulations are:

• Accounting standards: Accounting standards are authoritative statements of how particular types of transactions and events are reflected in the financial statements. International Financial Reporting Standards (IFRS) are used in Nigeria.

• Company law: Company law varies from country to country, but typically it sets out rules for determining profits available for distribution, issuing and redeeming of share capital, the reserves that a company must have and the uses to which they can be put. These matters are not covered in accounting standards. The main company law statute in Nigeria is the Companies and Allied Matters Act 2020, as amended.

• For listed companies, the listing rules of the relevant Stock Exchange: Listing rules set out the information which entities must supply when their shares are traded on a major stock market. They must comply with these rules in order to maintain their listing. These rules include requirements relating to information, including financial reports that entities must prepare and provide to the stock market while they are listed.

ii. There are several reasons why financial reporting should be regulated. Some of the reasons include:

• An entity is free to adopt any accounting treatment if there are no regulations;

• It ensures that external users of financial statements are provided with information that is relevant to their decisions;

• It helps to ensure that entities adopt similar accounting treatments for similar items and account for similar transactions in the same way. This makes it possible to compare the financial statements of different entities and the entities performance for the current year with those of the previous years; and Without regulation, management would adopt whichever accounting treatment that presents its results and position in the best possible light.

b. In line with the provision of IAS 1 – Presentation of Financial Statements. i. Minimum line items to be shown on the face of the statement of financial position are as follows: 33 Assets:

• Property, plant and equipment;

• Investment property;

• Intangible assets;

• Long-term financial assets, such as long-term holdings of shares in other companies;

• Investments accounted for using the equity method;

• Biological assets;

• Inventories;

• Trade and other receivables;

• Cash and cash equivalents;

• The total of assets classified as held for sale in accordance with IFRS 5; Liabilities:

• Trade and other payables;

• Provisions;

• Financial liabilities;

• Liabilities (but possibly assets) for current tax, as required by IAS 12: Income Taxes;

• Deferred tax liabilities and deferred tax assets as defined in IAS 12;

• Liabilities included in disposal groups in accordance with IFRS 5; Equity:

• Non-controlling interests presented within equity; and

• Issued capital and reserves attributable to the owners of the equity.

ii. Items that should be accounted for in the statement of changes in equity:

• Profit or loss for the period;

• Each item of other comprehensive income;

• New issues of shares;

• Payments of dividends;

• Repurchases and cancellation of its own shares by the company;

• Share premium;

• Revaluation reserve; and

• Fair value gain.

Examiner’s report The question tests candidates’ knowledge of sources and reasons why financial reporting are regulated. It also requires candidates to highlight minimum line items in statement of financial position and components of statement of changes in equity. Most candidates attempted the question and their performance was good. However, some candidates could not correctly state the reasons why financial reporting practice should be regulated. 34 Candidates are advised to cover all sections of the syllabus, particularly the areas on regulatory and financial framework for better performance in future examinations of the Institute. Marking guide Marks Marks a. i. Main sources of regulations Identification of three (3) main sources of regulation 11/2 Discussions of three (3) main sources of regulations 11/2 ii. Reasons for regulation of financial reporting Identification of any two reasons 2 5 b. i items to be presented on face of statement of financial position Stating five (5) line items to be disclosed on face of statement of financial position 5 ii. items to be accounted for in the statement of changes in equity Stating five (5) items to be accounted for in statement of changes of equity 5 10 Total 15 35 TABLE OF CONTENTS FOREWARD PAGE FINANCIAL REPORTING 3 - 33 AUDIT AND ASSURANCE 34 - 54 PERFORMANCE MANAGEMENT 55 - 89 PUBLIC SECTOR ACCOUNTING & FINANCE 90 – 116 CORPORATE STRATEGIC MANAGEMENT & ETHICS 117 - 140 TAXATION 141 – 170 2 ICAN/241/Q/B1 Examination No..................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA