Financial Reporting · May 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