Financial Reporting · November 2023

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