Financial Reporting · 2024

a. Badary Plc Statement of Cash flows for the year ended March 31, 2021 Operating activities: N’000 N’000 Cash received from customers (Wk 3) 460,000 Cash paid to suppliers (Wk 11) (346,000) Cash paid for other operating expenses (Wk 9) (122,500) Cash flow from operation (8,500) Finance cost paid (5,000) Taxation paid (Wk 1) (12,000) Net cash flows from operating activities (25,500) Investing activities: Dividend received 153,500 Purchase of plant and machinery by cash (Wk 4) (320,000) Proceeds from disposal of investment (Wk 10) 20,000 Proceeds from disposal of plant (Wk 5) 55,000 Purchase of investment by cash (Wk 6) (42,500) Net cash flows from investing activities (134,000) Financing activities: Proceeds from issue of shares (50,000 + 30,000) 80,000 Proceeds from issue of 10% Redeemable loan notes 40,000 Dividends paid by cash (5,500) Net cash flows from financing activities 114,500 Net increase in cash and cash equivalents for the year (45,000) Cash and cash equivalents at the beginning 35,000 Cash and cash equivalents at the end (10,000) 12 Working notes Wk 1: Taxation paid N'000 Opening balance 12,000 Income tax expense (SOPL) 70,000 Expected closing balance 82,000 Actual closing balance 70,000 Taxation paid 12,000 Wk 2: Proceeds from issue of shares N'000 Opening balance (120,000 + 30,000) 150,000 Closing balance (220,000 + 60,000) 280,000 Proceeds from issue of shares 130,000 Less: Bonus issue (50,000) 80,000 Wk 3: Cash received from customers N’000 Opening balance 60,000 Revenue for the year 490,000 Expected closing balance 550,000 Actual closing balance 90,000 Cash received from customers 460,000 Wk 4: Plant and machinery N’000 Opening balance 110,000 Disposal (40,000) Depreciation (10,000 + 30,000) (40,000) Expected closing balance 30,000 Actual closing balance 350,000 Acquisition by cash (320,000) Wk 5: Disposal of plant N'000 Carrying amount (40,000) Proceeds from disposal 55,000 Profit on disposal of plant 15,000 Wk 6: Investments N'000 Opening balance 30,000 Disposal (12,500) Expected closing balance 17,500 Actual closing balance 60,000 Acquisition by Cash (42,500) Wk 7: Cash and cash equivalents 2021 2020 N’000 N’000 Bank 15,000 40,000 Bank overdraft (25,000) (5,000) Cash and cash equivalent (10,000) 35,000 13 Wk 8: Retained earnings/bonus issue N'000 Opening balance 119,000 Profit for the year 216,500 Expected closing balance 335,500 Actual closing balance 280,000 55,500 Dividend declared and paid (5,500) Bonus issue 50,000 Wk 9: Cash paid for other operating expenses N'000 N'000 Accrued expenses b/f 50,000 Administrative expenses 90,000 Distribution cost 40,000 180,000 Add(Less): Profit of disposal 15,000 Depreciation on furniture (10,000) Depreciation on plant and equipment (30,000) Profit on disposal of Investment 7,500 Accrued expenses c/d (40,000) (57,500) Cash paid 122,500 Wk 10: Disposal of investment N’000 Carrying amount 12,500 Proceeds from disposal 20,000 Profit on disposal of plant (7,500) Wk 11: Cash paid to suppliers N'000 Cost of sales 222,000 Closing inventories 295,000 Opening inventories (120,000) Purchases for the year 397,000 Opening balance of trade payables 14,000 Expected closing balance 411,000 Actual closing balance of trade payables 65,000 Cash paid to suppliers 346,000 Wk 12: Dividend paid Ordinary share capital = N 220,000,000 = 275,000,000 shares 0.8 = 275,000,000 shares × 0.02 = N 5,500,000 14

b. Analysis of the profitability, gearing and investor’s stake in Badary Plc and recommended strategies for improving or sustaining them Profitability: The profit for the year is N216,500,000, indicating strong profitability. i) The company has a high gross profit margin of 54.7% (₦268,000/ ₦490,000); ii) A net profit margin of 44.2% (N216,500/₦490,000) to sustain the profitability level; iii) Badary Plc should continue to focus on cost control, particularly in administrative and distribution expenses; and iv) The company should explore new revenue streams and maintain its investment in profitable ventures Gearing: The gearing ratio, measured as non-current liabilities to equity: i) Is relatively low at 8.9% (₦50,000/₦560,000); ii) Indicates low financial leverage and a conservative capital structure; and iii) The company can consider taking an additional debt if needed for expansion, given its low gearing ratio. However, it should ensure that any new debt is manageable and contributes to revenue growth. Investors' Stake: The investors' stake is: i) well-represented with a substantial share capital of N220,000,000 and retained earnings of N280,000,000; ii) The company paid dividends, indicating good returns for shareholders, thus enhancing investors’ confidence; and iii) Badary Plc should maintain a consistent dividend policy and provide transparent financial reporting.

Examiner’s report The question tests candidates knowledge of preparation of statement of cash flows in accordance with IAS 7 using direct method while Part B of the question is on interpretation of financial statement with particular emphasis on profitability, gearing and determination of investor’s stake in the business. Majority of the candidates attempted the question and their performance was average. The candidates pitfalls include the following:

- Some candidates used indirect method to prepare the statement of cash flows when the question specifically requested for direct method; - Most of them that used the direct method could not correctly calculate cash received from customers and cash paid to suppliers under the operating activities; and 15

- Others could not properly interpret the financial statement of the company and make necessary recommendation for strategies required to improve or sustain the company. Candidates are advised to pay attention to all areas of preparation and interpretation of published accounts and also be conscious of the fact that the examiner may require the candidates to use a particular method to solve a problem, once the method is in the syllabus and permitted by the financial reporting standards.

Marking guide Marks Marks a. Preparation of statement of cash flows

- Correctly stating title of the statement ¼ - Stating operating activities items 1¾ - Workings for operating activities items 7¾ - Stating investing activities items 1½ - Workings for investing activities items 2 - Stating financing activities 1½ - Workings for financing activities items 3 - Stating cash and cash equivalents ¾ - Workings for cash and cash equivalents 1½ 20

b. Analysis of the profitability, gearing and investors stake in Badary Plc - Analysis of profitability Four points at 1 mark each 4 - Analysis of gearing Any three points at 1 mark each 3 - Analysis of investor’s stake Any three points at 1 mark each 3 10 Total 30 16

SECTION B

a. SOKOTO NIG. PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT OCTOBER 31, 2023 Non-current assets: N’000 Plant and machinery (2,600+560+80-64) 3,176 Furniture and fittings (1,600+400) 2,000 Goodwill (Wk3) 612 Total non-current assets 5,788 Current assets: Inventories (1,760+560-72) 2,248 Trade receivables (1,160+840-280-120) 1,600 Cash and cash equivalents 800 Total current assets 4,648 Total assets 10,436 Equity: Ordinary shares of N1 each 5,600 Retained earnings (Wk 6) 1,771 m 7,371 Non-controlling interests (Wk5) 665 Total equity 8,036 Current liabilities: Trade payables (2,200+440-120-280) 2,240 Bank overdraft 160 Total current liabilities 2,400 Total equity and liabilities 10,436 Working notes Wk 1: Group structure Sokoto Nig. PLC ---------------70% --------------- Niger Nig. LTD NCI = 30% Wk 2: Net asset of subsidiary At rep. date At acq. date Post- acq. N'000 N'000 N'000 Ordinary shares 1,360 1,360 Retained earnings 400 160 240 Fair value adjustments: Plant and machinery 80 80 - Depreciation (80 x 20% x 4years) (64) - (64) 1,776 1,600 176 17 Wk 3: Determination of goodwill on acquisition N'000 N'000 Fair value of consideration transfer: Cost of investment 1,600 NCI at fair value (30% x 1,360 x N1.50) 612 2,212 Less: Net assets of subsidiary at acquisition (1,600) Goodwill at acquisition 612 Wk 4: Unrealised profit N'000 URP = 360 × 25/125 72 Wk 5: Valuation of NCI N'000 NCI at acquisition (Wk 3) 612 Add: Share of Post-acquisition profit (30% x 176) 52.8 664.8 Wk 6: Consolidated retained earnings N'000 Sokoto Plc 1,720 Add: Share of post-acquisition profit (70% x 176) 123.2 Unrealised profit (72.0) Consolidated retained earnings 1,771

b. Accounting for investment in subsidiary in parent’s separate financial statements

i) Cost method: In accordance with IAS 27-Separate Financial Statements, the investment in a subsidiary is recorded at cost in the parent's separate financial statements. Dividends received from the subsidiary are recognised as income. ii) Fair value method: In accordance with IFRS 9-Financial Instruments, the investment can also be measured at Fair Value through Profit or Loss (FVTPL) or Fair Value Through Other Comprehensive Income (FVOCI) depending on the parent's business model.

Examiner’s report The question tests candidates knowledge of preparation of consolidated financial statements and how to account for investment in subsidiary in the separate financial statements of the parent. Most of the candidates attempted the question and performance was above average. The candidates that attempted the question were able to carry out the consolidation of the subsidiary and the parent, however some of them could not correctly determine the net assets of the subsidiary and the goodwill arising from consolidation as well as the consolidated retained earnings. Also, others could not explain how to account for the investment in subsidiary in the separate financial statement of the parent. 18 Preparation of consolidated financial statements of simple group is a section of the syllabus that is examined regularly at this level of the institute examination, hence candidates are advised to pay special attention to the provisions of IFRS 10 – Consolidated Financial Statements.

Marking guide Marks Marks a. Preparation of consolidated statement of financial position - Correctly stating of the title of the statement ¼ - Presentation of consolidated non-current assets 1 - Determination of goodwill on acquisition 5 - Workings for consolidated non-current assets 1½ - Presentation of consolidated current assets 1 - Workings for consolidated current assets 1¾ - Stating consolidated total assets ¼ - Stating the equity ¾ - Workings for consolidated retained earnings 1¼ - Determination of non-controlling interests 1½ - Presentation of consolidated current liabilities ¾ - Workings for consolidated current liabilities 1 - Stating total equity and liabilities ¼ - Determination of unrealised profit in inventory ¾ 17 Accounting bfor investment in subsidiary’s separate ) financial statements - Stating cost method ½ - Explanation of cost method 1 - Stating fair value method ½ - Explanation of fair value method 1 3 Total 20

Lamido Limited a. Computation of relevant ratios for the year ended December 31, 2021 and 2022 Ratios Formula 2022 2021 Operating profit margin PBIT x 100 Revenue = 7.99% 18,600 x 100 159,000 = 11.7% Return on capital employed PBIT x 100___ Capital employed 12,300 x 100 342,500 = 3.6% 18,600 x 100 214,640 = 8.7% Net asset turnover Revenue___ Net asset/equity 154,000 192,100 = 0.8 times 159,000 44,800 = 3.55 times 19 Current ratio Current assets Current liabilities 28,890 23,960 = 1.21:1 Interest cover PBIT___ Fixed interest 12,300 9,200 = 1.34 times 18,600 10,200 = 1.82 times Gearing Ratio Debt equity (130,960+19,440)x100 192,100 = 78.3% (150,400+19,440)x100 44,800 = 379%

b. Comments on performance and position of Lamido Ltd for the year ended December 31, 2022 Performance: i) Lamido LTD’S revenue has declined in the year. As Lamido has had exactly the same delivery volumes in the year, the decline in revenue must be due to company’s reducing units prices of certain courier packages. To substantiate this, it would be helpful to see the number of packages delivered by Lamido LTD during the year.

ii) In addition to the decline in revenue, there has been a decline in the operating profit margin in the year. As the volumes delivered by Lamido LTD has remained the same, it would appear that some costs incurred by Lamido LTD were relatively fixed and may not have changed significantly during the year. It has been noted that there has been an increase in the operating licence fees incurred by Lamido Ltd during the year. This would again cause the operating profit margin to fall.

iii) Return on capital employed has declined significantly due to a decline in the profit from operations, and the revaluation of non-current assets in the year by the company. This means that there is a large revaluation surplus in year 2022 which was not the case in year 2021. This will have the effect of reducing the return on capital employed due to a much larger total balance in equity. If the return on capital employed is calculated without this, it would be 6.2%, which still represents a decline in performance.

iv) Net assets turnover declined from 3.55 times to 0. 8 times. This will again be affected by the revaluation surplus, making the two years incomparable. If this is removed from the calculation, the net asset turnover will decrease slightly to 3.27 times, which is still a decrease in performance. Position: i) The value of non-current assets rose significantly in the year by ₦147 million. A large proportion of that will be due to the revaluation which took place, leading to an increase of ₦145 million. This suggests that Lamido LTD acquired some new assets in the year, which was not defined. 20 15,980 29,920 = 0.53:1

ii) The level of debt in the business is a concern, as this forms a significant portion of the company’s financing, and appears to incur a large annual repayment. The reduction in the current ratio can be attributed to the large decrease in cash, which is likely to be due to the debt repayment made.

iii) It is worth noting that Lamido LTD is almost completely funded by debt with a relatively small amount held in share capital. Therefore, there is an opportunity for a new investor to consider putting more money into the business in a forms of shares, the investing company then repaying some of the loans held by Lamido LTD. As the company is currently repaying ₦19.44 million a year on the loans, it may be more sensible to repay loan, if possible, freeing up a lot more cash for growing the business or to be returned annually in the form of dividends, also saving ₦9.2 million a year in interest. Areas of concern for the future: There are a number of things to consider regarding the future performance of Lamido LTD. i) Operating licences in five countries which are due for renegotiation. If the fees are raised, this will lead to reduction in profit being made by Lamido LTD.

ii) The debt appeared to being repaid in annual installments of N19.44 million, meaning that Lamido LTD needs to generate sufficient cash to repay loan each year before returning profit to the owner. In addition to this, ₦9.2 million interest means that the business appears currently unable to return any cash to investors. Finally, Lamido LTD’S business model is heavily depended on large expensive items of non-current assets. There has been criticism of under-investment in these, which could lead to large potential outlays in the near future to replace the assets. Conclusion: Lamido LTD has not shown a weakened performance in the current year, but appears to be profitable business at its core. The major issue with the business is the level of debt, which is resulting in ₦19.44 million annual repayments and ₦9.2 million annual interest. A new investor who will be able to reduce these debts as part of any future purchase, would be able to put the business in a much stronger cash position and profit performance. 21

Examiner’s report The question is on ratio analysis and interpretation of financial statements. Candidates are required to calculate profitability, liquidity and long term financial stability ratios, they are expected to comment on the financial performance and highlight qualitative future consideration issues that may affect the company. Most of the candidates attempted the question and performance was average. The candidates were able to correctly calculate the ratios however, most of them could not give correct interpretations to the ratios computed and they also failed to identify the qualitative future considerations. Candidates are advised to pay attention to all sections of the syllabus and make use of the Institute Pathfinder and Study Text for better performance in future examinations.

Marking guide Marks Marks a. Computation of relevant ratios

- Calculation of operating profit margin 1 - Calculation of return on capital employed 1 - Calculation of net asset turnover 1 - Calculation of current ratio 1 - Calculation of interest cover 1 - Calculation of gearing ratio 1 6

b. Comments on performance and position Lamido LTD i) Comments on performance

- Identifying four correct points at ½ mark each 2

- Explanation/Justification of the points at ½ mark each 2

ii) Comments on position

- Identifying four correct points at ½ mark each 2

- Explanation/Justification of the points at ½ mark each 2

iii) Comments on areas of concern for the future - Identifying four correct points at ½ mark each 2

- Explanation/Justification of the points at ½ mark each 2

iv) Conclusion

- Stating any two correct conclusion at 1 mark each 2 14 Total 20 22

a. Differences between impairment and depreciation

i. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, resulting in an economic reduction in the value of the asset. ii. Impairment is recognised when there is evidence that an asset’s value has declined below its carrying amount, and the asset must be written down to its recoverable amount. iii. Impairment losses are typically unexpected and result from specific events or circumstances, such as market declines, technological obsolescence, or legal restrictions. While iv. Depreciation is the systematic allocation of the depreciable amount of an item of property, plant and equipment over its estimated useful life. v. It represents the estimated portion of the depreciable amount of an asset consumed on a yearly basis over the number of years with which the asset will generate economic benefit to the entity. vi. Depreciation is accounted for annually, based on the asset’s estimated useful life and residual value. b. Indicators of impairment: IAS 36 requires that at each reporting date, an entity must assess whether there are indicators of impairment. Indications that impairment might have happened can come from external or internal sources: Internal sources: External sources:

• Evidence of obsolescence or damage.

• Unexpected decrease in an asset’s market value.

• There is, or about to be, a material reduction in the usage of an asset.

• Significant adverse changes have taken place, or are about to take place, in the technological market, economic or legal environment.

• Evidence that the economic performance of an asset has been, or will be worse than expected.

• An increase in interest rates affecting the value-in-use of the asset.

• There is a reduction in the assets expected remaining useful life.

• The carrying amount of the net assets of the entity is more than its market capitalisation

i) Identifyi.ng and accounting for impairment of assets:

• At the end of each reporting period, the entity should assess whether there are any indications that an asset may be impaired; 23

• If there are such indications, the entity should estimate the asset's recoverable amounts;

• When the recoverable amount is less than the carrying amount of the assets, the entity should reduce the assets' carrying amount to its recoverable amount. The amount by which the value of the assets is written down is an impairment loss;

• The impairment loss shall be recognised immediately in the statement of profit or loss;

• However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset;

• Such an impairment loss on a revalued asset reduces the revaluation surplus for that asset; and

• After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

c. According to IAS 36, an asset is said to be impaired when its recoverable amount is less than its carrying amount in the statement of financial position. The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value-in-use. Zamfara LTD non-current asset recoverable amount of N600,000 is less than its carrying amount of N720,000 (wk 1) hence there is an impairment loss. See computation below. N Carrying amount (wk. 1) 720,000 Recoverable amount (600,000) Impairment loss 120,000 The non-current asset must still be written down by N120,000. However, N50,000 of this would be recognised in other comprehensive income and the remaining N70,000 (N120,000 – N50,000) would be charged to the statement of profit or loss as an impairment loss. 24 The accounting entry is as follows: Debit Credit N N Impairment loss (Statement of profit or loss) 70,000 Revaluation surplus (other comprehensive income) 50,000 Non-current asset 120,000 The recoverable amount of the non-current asset of N600,000 will be subject to depreciation going forward over the remaining useful life on a systematic basis. Working 1: Calculation of carrying amount of non-current asset N Carrying amount at the beginning 800,000 Depreciation for the year (80,000) Carrying amount at the end of the year 720,000

Examiner’s report The question tests candidates knowledge of the provisions of IAS 36- Impairment of Assets and the differences between depreciation and impairment. Few candidates attempted the question and performance was below average. Most candidates could not explain the accounting treatments of impairments and others could not state the differences between impairment and depreciation. Candidates are advised to pay more attention to the provisions of relevant International Financial Reporting standards (IFRS) as well as its applications for better performance in future examinations.

Marking guide Marks Marks

a. Differences between impairment and depreciation

- Stating any five differences at 1 mark each 5

b. Discussion of IAS 36- Impairment of Assets

i) Indicators of impairment

- Identifying any six indicators at ½ mark each 3 ii) How to identify and account for impairment

- Discussion of any six points on identification and accounting for impairment at ½ mark each 3 6

c. Explanation with computation of accounting treatment of the given scenario - Any nine points at 1 mark each 9 Total 20 25

a. Explanation of prior-period errors Prior-period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior-periods arising from a failure to use, or misuse of, reliable information that: i. was available when financial statements for those periods were authorised for issue; and ii. could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Correction of prior-period errors i. According to the provision of IAS 8, an entity shall correct material prior- period errors retrospectively in the first set of financial statements authorised for issue after their discovery by:

• Restating the comparative amounts for the prior period(s) presented in which the error occurred; or

• If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, and equity for the earliest prior period presented. ii. The correction of a prior period is excluded from the statement of profit or loss in the period when the error was discovered. Examples of prior-period errors: i. The effects of mathematical mistakes; ii. Mistakes in applying accounting policies; iii. Oversights or misinterpretations of facts; and iv. Fraud.

b. Lagos Company Nigeria Limited Statement of profits or loss and other comprehensive income for the year ended December 31 2022 2021 N'000 N'000 Revenue 268,800 189,600 Cost of sales (Wk 1) (206,400) (155,080) Profit before tax 62,400 34,520 Income tax expenses (Wk 2) (18,640) (10,480) Profit for the year 43,760 24,040 26 Statement of movement in retained earnings for the year ended December 31 2022 2021 N'000 N'000 Balance at January 1 (wk 3) 76,040 52,000 Profit for the year 43,760 24,040 Balance at December 31, 2021 119,800 76,040 Working note Wk 1: Cost of sales 2022 2021 N'000 N'000 Balance b/f 223,200 138,280 Adjustment for inventory overcast (16,800) 16,800 Balance to SOPL 206,400 155,080 Wk 2: Income tax expense 2022 2021 N'000 N'000 Balance b/f 13,600 15,520 Tax effect of Inventory overcast at 30% 5,040 (5,040) Balance to SOPL 18,640 10,480 Wk 3: Opening retained earnings N'000 January 1, 2021 (per question) 52,000 Add: profit for the year 2021 35,800 87,800 Less: Error in inventory 2021 (16,800) Add: Related tax at 30% 5,040 76,040

Examiner’s report The question tests candidates knowledge of the provisions and applications of IAS 8- Accounting Policies, Changes in Accounting Estimates and Errors. The part (a) of the question requires candidates to explain prior period errors and to discuss how such errors are corrected, giving examples. part (b) deals with the application of the correction of prior period errors in the books of a company and disclosure of such correction in the statements of profit or loss. Most candidates attempted the question but performance was below average. The candidates performance in part (a) of the question was fair, however, majority of the candidate could not apply the provisions and principles in part (a) to solve the question in part b and this led to loss of valuable marks. Candidates are advised to pay special attention to relevant accounting standards at this level of the Institute’s examination for better performance in future. 27

Marking guide Marks Marks a. Explanation, correction and examples of prior-period errors i) Explanation of prior-period errors - Any three points at 1 mark each 3

ii) Correction of prior-period errors - Any three points at 1 mark each 3

iii) Examples of prior-period errors - Any two examples at ½ mark each 1 7

b. Preparation of statement of profit or loss and other comprehensive income and retained earnings Extracts with comparative figures i) Presentation of statement of profit or loss

- Correct stating of the title ¼ - Stating of revenue ½ - Determination and stating the cost of sales 1½ - Stating profit income tax ½ - Computation of income tax expense 1½ - Stating the profit for the year ½

ii) Presentation of statement of movement in retained earnings - Correctly stating of the title ¼ - Stating the opening balances ½ - Workings for determination of opening balance 2022 1½ - Stating the profit for the year ½ - Stating closing balances of retained earnings ½ 8 Total 15 28

MEMO From: Accountant To: Senior Accountant Subject: Treatment of financial Instruments in accordance with IAS 32 Transaction 1

i. IAS 32 requires a financial instrument to be classified as a liability if there is a contractual obligation to deliver cash or another financial assets to another entity. ii. In the case of the preference shares as they are non-redeemable, there is no obligation to repay the principal. iii. In the case of the dividends, because of the condition that preference dividend will only be paid if ordinary dividend are paid in relation to the same period, the preference shareholders has no contractual right to a dividend. Instead the distributions to holders of the preference shares are at the discretion of the issuer as Akwa Nig. Ltd. can choose whether or not to pay an ordinary dividend and therefore a preference dividend. Therefore, there is no contractual obligation in relation to the dividend. iv. As there is no contractual obligation in relation to either dividend or principal, the definition of a financial liability has not been met and the preference shares should be treated as equity and initially recorded at fair value of N40million. v. The treatment of dividends should be consistent with the classification of the shares and should be charged directly to retained earnings in the statement of changes in equity. Transaction 2

i. The price of the equipment, a non-current asset is fixed at N5million one year after delivery. In terms of recognition and measurement of the equipment, the N5million price would be discounted back one year to its present value. ii. The company is paying for the equipment by issuing shares. However, this is outside the scope of IFRS 2-Share Based Payments because the payment is not dependent on the value of its shares, it is fixed at N5million. iii. This is an example of a contract that will be settled in an equity instruments and is non-derivative for which the entity is or may be obliged to deliver a variable number of equity’s own equity instrument i.e. it is a Financial Liability. iv. Therefore, it is a financial liability and initially measured at the present value of the N5million. v. Subsequently, as it is not measured at fair value through profit or loss (as it is not held for a short-term profit making or a derivative) it should be measured at amortise cost. 29

vi. As a result, interest will be applied to the discounted amount over the period until payment are recognised in statement of profit or loss with corresponding increase in the financial liability. Transaction 3

i. Most ordinary shares are treated as equity as they do not contain contractual obligation to deliver cash. ii. However, in the case of the directors shares, a contractual obligation to deliver cash exists on specific date as the share are redeemable at the end of service contract of the directors. iii. The redemption is not discretionary and Akwa LTD has no right to avoid it. The mandatory of the repayment make the capital a Financial Liability. iv. The dividend payment are discretionary as they must be ratified at the Annual General Meeting (AGM). Therefore no liability should be recognised for any dividend until it is ratified. When recognised the classification of the dividend should be consistent with that of the shares and therefore, the dividends should be classified as a finance cost rather than as a deduction from retained earnings hence the dividend should be charged to the statement of profit or loss as finance cost. Conclusion Hope the above explanation is clear. If you need further explanation do not hesitate to contact me. Thank you. Accountant

Examiner’s report The question tests candidates knowledge of the provisions of IAS 32 – Financial Instruments: Presentation. Candidates are required to apply the provisions of this standard to determine how various transactions should be disclosed and accounted for in the financial statements of an entity. Few candidates attempted the question and performance was poor. Majority of the candidate did not understand the question and could therefore not determine the nature of the type of financial instruments in the transactions, while few that could identify it were unable to give any justifiable reason for the identification of the financial instrument. Most candidates appeared not to be familiar with this area of the syllabus, hence the poor performance. They are therefore advised to cover all sections of the syllabus for better performance in future examination of the Institute. 30

Marking guide Marks Marks Treatment of Financial Instruments in accordance with IAS 32 i) Transaction 1

- Any five points on justification of treatment of the financial instrument at 1 mark each 5

ii) Transaction 2

- Any five points on justification of treatment of the financial instrument at 1 mark each 5

iii) Transaction 3

- Any four points on justification of treatment of the financial instrument at 1 mark each 4 - Memo format of presentation ½ - Conclusion of report ½ 1 Total 15

a. (i) Cost model

• An intangible asset is carried at cost less accumulated amortisation and any accumulated impairment losses after initial recognition.

(ii) Revaluation model

• Intangible assets can be revalued according to the same rules as those applied to the revaluation of property, plant and equipment.

• An intangible asset is carried at a revalued amount (its fair value at the date of the revaluation less any subsequent accumulated amortisation and any accumulated impairment losses).

• This is only allowed if the fair value can be determined by reference to an entire market in that type of intangible assets.

b. Calculation and explanation of the carrying amount and revaluation surplus of the intangibles

i) Carrying amount as at December 31, 2019 N Cost of registering licence 90,000 Revaluation surplus account [N94,500 x 15 – N90,000] 1,327,500 Carrying amount Dec 31, 2019 (Fair value) 1,417,500 Explanations: - The initial cost of N700,000 incurred should be written off into the statement of profit or loss because the generation of its future economic benefits is not probable then. - The fair value of the licence as at December 31, 2019 would be N1,417,500 31 [N 94,500 x 15 taxis] since the cost is N90,000 the revaluation reserve account will be credited with N1,327,500 and intangible asset debited with same amount.

ii) Calculation as at December 31, 2022 (Before regular revaluation) Explanations: - The accumulated amortisation on the revalued amount for 3 years will be; (N1,417,500 x 3/9) = N472,500 whereas, the accumulated amortisation would have been (N90,000 x 3/9) = N30,000 Carrying amount: N Bal. B/fwd (Jan 1. 2020) 1,417,500 Less: Amortisation (472,500) Carrying amount 945,000 Revaluation surplus (Jan 1, 2020) 1,327,500 Transfer to retained earnings (N1,327,500 x 3/9) (442,500) Revaluation surplus bal. Dec 31, 2022 885,000

iii) Calculation as at December 31 2022 (After regular revaluation) - Carrying amount of the licence immediately before revaluation is N945,000 (N1,417,500 – N472,500) - The revalued carrying amount is N675,000 (N45,000 x 15) :. There is a deficit of (N945,000 – N675,000) = N270,000 which should be recognised in the revaluation reserve. :. Revaluation reserve: N Bal. B/fwd regular revaluation 885,000 Less deficit (270,000) Revaluation reserve Dec 31, 2022 615,000 Carrying amount N675,000

Examiner’s report The part (a) of the question tests candidates knowledge of the measurement models of intangible assets, while part b requires practical application of the measurement of the intangible assets. Few candidates attempted the question and performance was poor. Some candidates were able to explain the two measurement models of intangible assets but majority of them could not correctly answer the part (b) of the question which requires practical application of the provisions of IAS 38 – Intangible Assets. 32 Candidates are advised to note that examiners will sometimes require practical application of the provisions of relevant accounting standards, hence attention should not only be placed on learning the provisions but also on its practical applications for better performance in future examinations.

Marking guide Marks Marks a. Discussion of two measurement models for intangible assets - Stating and discussing cost model 1 - Stating and discussing revaluation model 2 3

b. Calculation and explanation of the carrying amount and revaluation surplus of the Intangibles i) Carrying amount at December 31, 2019 - Calculation of carrying amount 2 - Explanation of the calculation 1

ii) Carrying amount at December 31, 2022 (before regular revaluation) - Calculation of carrying amount 1½ - Explanation of the calculation 2 - Calculation of revaluation surplus 1½

iii) Carrying amount at December 31, 2022 (after regular revaluation) - Calculation of carrying amount 2 - Explanation of calculation 1 - Calculation of revaluation surplus 1 12 Total 15 33 ICAN/242/Q/B1 Examination No..................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

Konko-Below Plc a) Statement of profit or loss and other comprehensive income for the year ended March 31, 2023

Note N'm Revenue 1,392.0 Cost of sales 1 (578.5) Gross profit 813.5 Operating expenses (78.0) Income from investment property 23.0 Fair value gain on Investment properties (7% × N450) 31.5 Operating profit 790.0 Finance cost 2 (50.0) Profit before taxation 740.0 Income tax expenses 3 (150.0) Profit for the year 590.0 Other comprehensive income: Gain on revaluation of land & building 4 225.0 Total comprehensive income 815.0 Konko-Below Plc b) Statement of changes in equity for the year ended march 31, 2023 Ordinary share Revaluation surplus Retained earnings Total N’m N’m N’m N’m Balance b/f (April 1, 2022) 750 - 598 1,348 Profit for the year - - 590 590 Gain on revaluation - 225 - 225 Dividend paid - - (75) (75) Balance to SOFP (March 31, 2022) 750 225 1,113 2,088 14 Konko-Below Plc c) Statement of financial position as at March 31, 2023

Note N’m Non-current asset: Property, plant and equipment 5 2,170.5 Investment properties (at fair value) 6 481.5 Total non-current assets 2,652.0 Current assets: Inventory 216.0 Trade receivables 266.0 Total current assets 482.0 Total assets 3,134.0 Equity and liabilities: Equity: Ordinary shares of N1 each 750.0 Revaluation reserves on land and building 225.0 Retained earnings 1,113.0 Total equity 2,088.0 Non-current liabilities: Deferred tax 3 b) 70.5 8% loan notes 250.0 Lease liabilities 7 275.0 Total non-current liabilities 595.5 Current liabilities: Trade payables 167.0 Accrued interest expenses 8 5.0 Lease liabilities 7 110.0 Current tax payables 141.5 Bank overdraft 27.0 Total current liabilities 450.5 Total liabilities 1,046.0 Total equity and liabilities 3,134.0 Working notes Wk 1: Cost of Sales N’m Opening inventories 189.0 Purchases 31.5 Closing inventories (216.0) Depreciation (Wk 1) 214.5 SOPL 578.5 Wk 2: Lease rentals N’m Outstanding lease obligation 385 15 Net obligation at inception (N460 110) (350) Lease obligation accrued interest 35 Finance cost on loan interest (8% x N250m x 9/12) 15 50 Wk 3a: Income tax expenses N’m Current year charges 141.5 Increase in deferred tax (Wk 3b) 8.5 Accrued to SOPL 150.0 Wk 3b: Deferred tax N’m Opening balance 62.0 Closing balance 70.5 Increase in deferred tax (Wk 3a) 8.5 Wk 4: Gain on revaluation of land and building: Land N’m Building N’m Cost of land and building 31/3/2023 350 700 At valuation 31/3/2023 400 875 Gain on revaluation 50 175 Total gain on revaluation (50 + 175) = N225 Wk 5: Schedule of movement in PPE for the year ended March 31, 2023 Cost/valuation: Land Building P/Equip Total N’m N’m N’m N’m Balance b/f 350.0 1,000.0 780.0 - 2,130.0 Additions - - - 460.0 460.0 Revaluation 50.0 175.0 - - 225.0 Balance c/f 400.0 1,175.0 780.0 460.0 2,815.0 Acc. depreciation: Balance b/f - 300.0 130.0 - 430.0 Current year charges - 25.0 97.5 92.0 214.5 Balance c/f - 325.0 227.5 92.0 644.5 Carrying amount: Balance c/f 400.0 850.0 552.5 368.0 2,170.5 Balance b/f 350.0 700.0 650.0 - 1700.0 Wk 6: Investment properties N’m Valuation at April 1, 2022 450.0 Fair value gain (7% x N450m) 31.5 Balance to SOFP 481.5 Wk 7: Lease liabilities N’m Fair value of Right of Use (ROU) 460.0 Payment made during the year (wk 9) (110) Lease Interest 35 Balance to SOFP 385 ROU N’m 16 Classified into: Non-current 275 Current 110 385 Wk 8: 8% Loan Interest N’m SOPL Current year charges 15.0 Loan interest paid as per TB (10.0) Accrued to SOFP 5.0 Wk 9: Lease amortisation schedule Year ended Balance b/f Lease payment Balance outstanding Interest at 10% Balance c/f N’m N’m N’m N’m N’m 2023 460.0 110.0 350.0 35.0 385.0 2024 385.0 110.0 275.0 27.5 302.5 2025 302.5 110.0 192.5 19.3 211.8 2026 211.8 110.0 101.8 8.3 110.0 2027 110.0 110.0 - - -

Examiner’s report The question tests the preparation of single entity’s final accounts, which requires the presentation of statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position. Majority of the candidates attempted the question and their performance was average. The commonest pitfall was the inability of most candidates to apply the provisions of IFRS 16 – lease, hence they could not properly identify the Right of Use (ROU) of the leased assets as required under International Financial Reporting Standards. Also, others could not properly account for deferred tax provisions in accordance with IAS 12- Income tax. Candidates are advised to pay more attention to the preparation of final accounts of single entity as this is a regular area of the syllabus that are examined at this level of the institute’s examinations.

Marking guide Marks Marks a) Preparation of statement of profit or loss and other comprehensive income: Title of the statement ¼ Determining the gross profit ¾ Determining the profit before taxation 1½ Income tax expenses ¼ 17 Profit for the year ¼ Stating total comprehensive income ½ Workings for cost of sales 2 Workings for lease rentals 2 Workings for gain on revaluation 1½ Showing other workings for profit or loss items 1 10

b) Preparation of statement of changes in equity: Title of the statement ½ Opening balance of components of equity 1½ Profit for the year 1 Gain on revaluation 1 Dividend paid 1 Total equity 1 6

c) Preparation of statement of financial position: The title of the statement ¼ Non-current assets ¾ Current assets 1 Total assets ¼ Components of equity 1 Non-current liabilities 1 Current liabilities 1½ Total equity and liabilities ¼ Workings for movement in PPE 5¼ Workings for lease amortisation schedule 1 Workings for investment properties ¾ Workings for lease liabilities 1 14 Total 30 18

SECTION B

(a) Computation of ratios of Orak Nigeria Limited for the year ended Sept. 30, 2023 S/N Ratios Orak Nig. Limited

i) Gross profit x 100 Capital employed 95,130 x 100 95,400 = 99.72%

ii) Profit before Tax x 100 Capital employed = Gross profit to capital employed = Pre-tax profit to capital employed = = Gross profit margin = = ==marginOCE = Net profit margin = = = Non-current asset turnover = = = Receivables collection period = = = Payables payment period = = = Inventory turnover = = = Revenue per employee (N) = = = Dividend cover = = = 17,100 x 100 95,400 = 17.92%

iii) Gross profit x 100 Revenue 95,130 x 100 220,950 = 43.05%

iv) Profit for the year x 100 Revenue 17,100 x 100 220,950 7.74%

v) Revenue Non-current asset 220,950 80,460 2.75 times

vi) Trade rec. x 365 days Revenue 13,140 x 365 days 220,950 22 days

vii) Trade Payable x 365 days Purchases 21,960 x 365 days 125,820 64 days

viii) Inventories x 365 days Cost of Sales 20,880 x 365 days 125,820 61 days

ix) Revenue Number of employees 220,950,000 54 staff N4,091,667

x) Profit for the year Dividend 11,970 5,850 2.05 times 19

xii) Current assets Current liabilities Current ratio = 36,900 21,960 1.68:1

xiii) Quick ratio = Current assets – inventory Current liabilities = = = = 36,900 – 20,880 21,960 0.73:1

(b) Analysis of financial position and performance of Orak Nig. Ltd for the year 2023 Based on the ratios calculated and the data provided in the financial statements, here is an analysis of Orak Nigeria Ltd's financial performance and position. Profitability (i) Gross profit margin (43.1%) Orak Nig. Ltd maintains a strong gross profit margin, indicating good control over cost of sales relative to revenue. This level of profitability suggests that the company effectively manages its production and operational costs.

(ii) Net profit margin (7.7%) While the net profit margin is significantly lower than the gross profit margin, it reflects moderate profitability after accounting for all other costs. This suggests a room for improvement, especially in controlling overhead or financing costs.

(iii) Return on capital employed (ROCE)

• Gross profit to capital employed (65.1%)

• Pre-tax profit to capital employed (13.8%) These figures suggest that Orak Nig. Ltd generates relatively strong returns on its capital employed, especially when analysing profit before tax. Datamatics Plc can expect reasonable returns on their investment based on this performance.

(iv) Revenue per employee is 168% higher than the industry average, which is a reflection of the profitability and revenue generation of Orak Nig. Ltd. This is an evidence that the company is able to charge high prices and also put in place cost control measures.

(v) However, we do not have detailed information about the salaries and wages of the employees of Orak Nig. Ltd. If the salaries of the employees of Orak are higher than that of Datamatic Plc, this may lead to demand for higher salaries among the workforce of Datamatics Plc.

(vi) With the acquisition of Orak Nig. Ltd. by Datamatics Plc, which is a larger company, this could further lead to economic of scale and even cheaper supplies. 20

(vii) As Orak Ltd is currently paying high dividend, this will be good news for shareholders of Datamatics Plc.

(viii) Also pre-tax ROCE and pre-tax profit margin 38% and 5% respectively are higher than industry average which support the view that Orak Nig. Ltd. is able to charge high prices. This would appear to be as a result of specialisation of the service of Orak Nig. Ltd.

(ix) Should Orak Ltd acquire Datamatics Plc, Orak Limited will benefit from price premium thereby generating better profitability for Datamatics Plc. Liquidity (i) Current ratio (1.68) A current ratio above 1 shows that Orak Nig. Ltd has sufficient short-term assets to cover its short term liabilities. This is a good liquidity position, reducing the risk of cash flow problems.

(ii) Quick ratio (0.73) The quick ratio indicates weaker liquidity after inventories are excluded, suggesting some reliance on inventory turnover to meet liabilities. Datamatics Plc should consider whether this reliance aligns with their risk appetite. Efficiency (i) Receivables collection period (22 days) Orak Nig. Ltd collects receivables efficiently within 22 days on average, which is a positive indicator of cash flow management.

(ii) Payables payment period (64 days) The company takes about 64 days to pay suppliers, which may suggest they are effective in managing cash flow. However, this could strain supplier relationships if extended further.

(iii) Inventory turnover period (61 days) Inventory turnover is satisfactory, indicating that Orak is not overstocked and it can efficiently convert inventory into sales. Investment efficiency (i) Non-current asset turnover (2.75) Orak Nig. Ltd current assets turnover is 2.75. However, the industrial average is not provided for comparison.

(ii) Revenue per employee (₦2.313 million) This is a good productivity ratio, when compared with the industrial average. 21 Dividend sustainability

• Dividend Cover (2.05) The net profit at Orak Nig Ltd covers it dividend more than twice, indicating the sustainability of the company. This is a positive indicator for Datamatics, as it shows the company’s ability to distribute profits without jeopardising reinvestment opportunities. Industry analysis when compared to the computer component manufacturing industry:

(i) Orak Nig. Ltd’s profitability is above average in gross profit but slightly below average in net profit.

(ii) Liquidity metrics such as the current ratio are strong, but the quick ratio and reliance on inventory pose potential risks.

(iii) Operational efficiency in receivables collection is better than industrial average, though payables and inventory turnover needs improvement.

(iv) Productivity metrics suggest that the company is slightly behind in revenue per employee but is comparable with industry benchmarks. Limitations and risks

(i) Net profit margin: The net profit margin is relatively low, indicating that overhead costs and other expenses could be reducing profitability.

(ii) Reliance on inventory: The quick ratio suggests that Orak Nig. Ltd relies on inventory for short term liquidity, posing a potential risk if inventory turnover reduces overtime.

(iii) Customer dependence: Orak Nig. Ltd has only two main customers. A loss of either could severely impact revenue and profitability.

(iv) Receivable collection period of 22 days is exceptionally low when compared with industry average. This is probably due to the fact that Orak Nig. Ltd has only has two main customers making it possible to form close working relationship. Given the specialisation that Orak Nig. Ltd provides, it is likelythat its customers do not want to spoil their relationship by delaying payments. There is no reason to believe that this will change if Datamatics acquires the company.

(v) Payable payment period of 64 days is almost twice the industry average and reflect either a strict cash management policy within Orak Nig. Ltd or a potentially cash flow problem. However, given the high profitability within Orak Nig. Ltd, and its healthy statement of financial position items it would appear that Orak Nig. Ltd has squeezed its suppliers quite hard. If Orak 22 Nig. Ltd. is acquired by Datamatics Plc, there may be need to change this policy.

(vi) Inventory turnover of 61 days indicates that the production process within Orak Nig. Ltd. is about two months and may be a reflection of the complexity of the manufacturing process that it undertakes. This may largely be as a result of safety checks, which are key features of supply of specialised computer components and the time taken may contribute to the 61-day figure. Recommendation Datamatics Plc’s investment in Orak Nigeria Limited appears to be worthwhile, based on the following:

(i) Orak Nig. Ltd is generating strong gross profit margins and acceptable ROCE, making it a profitable company.

(ii) Liquidity and operational efficiency ratios are within acceptable ranges.

(iii) Integration of Orak Nig. Ltd’s services into Datamatics PLC could reduce costs and increase operational synergies. However, Datamatics Plc should consider:

(i) Reducing Orak Nig. Ltd’s reliance on a few key customers. (ii) Exploring opportunities to improve net profit margins through better cost management. (iii) Engaging in proactive management to mitigate risks and maximise returns.

Examiner’s report The question tests the computation and analyses of financial ratios for investment decisions. Majority of the candidate attempted the question and their performance was above average. The candidates performed very well in the computation of the required ratios, but most could not give proper interpretation to the computed ratios. Candidates are advised to pay more attention to the interpretation of financial statements at this level of the institute’s examination rather than focusing on computation of relevant financial ratios. 23

Marking guide Marks Marks a) Computation of relevant ratios: Calculation of: Gross profit to ROCE 1 Pre-tax to ROCE 1 Gross profit margin 1 Net profit margin 1 Non-current asset turnover 1 Receivables collection period 1 Payables payment period 1 Inventory turnover 1 Revenue per employee 1 Dividend cover 1 Calculation of current ratio 1 Quick ratio 1 12

b) Analysis of financial position and performance Analysis of financial performance: Any 6 correct points at ¼ mark each 3 Analysis of financial position: Any 8 correct points at ½ mark each 4 Stating recommendation ½ Stating reservation ½ 8 Total 20 24

Papaya Plc Consolidated statement of cash flows for the year ended December 31, 2022 Operating activities: N'000 N'000 Profit before tax 4,200 Add/less: Adjustment: Depreciation 2,100 Cashflow from operation before working capital 6,300 Working capital changes: Increase in inventories (Wk 1) (1,800) Increase in trade receivables (Wk 1) (2,400) Increase in trade payables and accruals (Wk 1) 1,300 (2,900) Cash flows from operation 3,400 Taxation paid (Wk 2) (1,000) Net cash flows from operating activities 2,400 Investing activities: Purchase of subsidiary (Wk 4) (900) Purchase of property, plant and equipment (Wk 3) (2,200) Net cash flows from investing activities (3,100) Financing activities: Proceeds from issue of shares (Wk 6) 1,000 Dividend paid to NCI by cash (Wk 5) (40) Net cash flows from financing activities 960 Net Increase in cash and cash equivalents for the year 260 Cash and cash equivalent at the beginning 500 Cash and cash equivalent at the end 760 Working notes Wk 1: Increase/decrease in working capital Inventory N’000 Trade rec. N’000 Trade pay. N’000 Opening balance 12,000 11,000 15,200 Acquisition of subsidiary 700 300 400 Expected closing balance 12,700 11,300 15,600 Actual closing balance 14,500 13,700 16,900 Increase/decrease (1,800) (2,400) (1,300) Wk 2: Taxation paid N’000 Opening balance 1,000 Current year charge 1,500 Expected closing balance 2,500 25 Actual closing balance 1,500 Cash paid 1,000 Wk 3: Purchase of PPE by cash N’000 Opening balance 23,000 Acquisition of subsidiary 1,900 Depreciation charge for the year (2,100) Expected closing balance 22,800 Actual closing balance 25,000 Additional purchase by cash (2,200) Wk 4: Purchase of subsidiary N’000 Acquisition cost in cash 1,000 Cash portion of net asset acquired (100) Cash paid 900 Wk 5: Dividend paid to NCI N’000 NCI at acquisition (10% x 2,600) 260 Share of post-acquisition profit 90 Expected closing balance 350 Actual closing balance 310 Cash dividend paid 40 Wk 6: Proceeds from issue of shares Share capital N’000 Total N’000 Opening balance 10,000 5,000 15,000 Shares issue towards the acquisition of subs. 1,000 1,000 2,000 Expected closing balance 11,000 6,000 17,000 Actual closing balance 11,500 6,500 18,000 Shares issued for cash 500 500 1,000

Examiner’s report The question examines the candidates’ ability to prepare consolidated statement of cash flows of a simple group, using the indirect method. Most of the candidates attempted the question and their performance was below average. Those candidates that attempted the question approached it as if they were preparing statement of cash flows for a single entity hence most of them did not make necessary adjustments to reflect the effect of the subsidiary on the cash flow of the group and this led to loss of valuable marks. Candidates are advised to cover all sections of the syllabus, on group accounts and other related topics for better performance in future examinations. 26 Share premium N’000

Marking guide Marks a) Preparation of consolidated statement of cash flows Title of the statement ½ Determination of cash flows from operating activities 2¾ Determination of cash flows from investing activities 1 Determination of cash flows from financing activities 1 Stating cash and cash equivalents ¾ Determination of movement in working capital 4 Workings notes for taxation paid 1½ Stating working notes for cash purchase of PPE 1¾ Working notes for purchase of subsidiary 1 Calculation of dividend paid to NCI 1¾ Calculation of proceed on issue of shares 4 Total 20

Ogbagi Plc Statement of cash flows for the year ended December 31, 2022 Operating activities: N'000 N'000 Cash received from customers (Wk 2) 3,164,000 Cash paid to suppliers (Wk 3) (1,928,000) Cash paid to employees (Wk 5) (476,000) Cash paid for other operating expenses (Wk 4) (314,800) Cash flow from operation 445,200 Interest Received (Wk 7) 20,200 Interest paid (Wk 6) (15,200) Taxation paid (Wk 1) (100,000) Net cash flows from operating activities 350,200 Investing activities: Purchase of plant and equipment by cash (Wk 8) (200,000) Purchase of intangible by cash (60,000) Proceeds from disposal of plant (Wk 9) 56,000 Net cash flows from investing activities (204,000) Financing activities: Proceeds from issue of long-term borrowings 40,000 Dividend paid by cash (200,000) Net cash flows from financing activities (160,000) Net increase in cash and cash equivalents for the (13,800) 27 year Cash and cash equivalents at the beginning 240,000 Cash and cash equivalents at the end 226,200 Working notes Wk 1: Taxation paid N'000 Opening balance (56,000 + 20,000) 76,000 Income tax expense (120,000 + 2,400) 122,400 Expected closing balance 198,400 Actual closing balance (64,000 + 34,400) 98,400 Taxation paid 100,000 Wk 2: Cash received from customers N'000 Opening balance 280,000 Revenue for the year 3,200,000 Expected closing balance 3,480,000 Actual closing balance 316,000 Cash received from customers 3,164,000 Wk 3: Cash paid to suppliers N'000 Cost of sales 1,920,000 Closing inventories 280,000 Opening inventories (260,000) Purchases for the year 1,940,000 Opening balance of account payables 168,000 Expected closing balance 2,108,000 Actual closing balance of account payables 180,000 Cash paid to suppliers 1,928,000 Wk 4: Cash paid for other operating expenses N'000 Accrued other expenses b/f 12,000 Prepayment b/f (32,000) Other expenses charge to SOPL 304,000 Accrued other expenses c/f (7,200) Prepayment c/f 38,000 Cash paid 314,800 Wk 5: Cash paid to employees N'000 Opening balance 16,000 Staff remunerations for the year 480,000 Expected closing balance 496,000 Actual closing balance 20,000 Cash paid 476,000 28 Wk 6: Interest paid N'000 Opening balance – Interest expense charged to SOPL 16,000 Expected closing balance 16,000 Actual closing balance 800 Interest paid 15,200 Wk 7: Interest received N'000 Opening balance 600 Interest income for the year 20,000 Expected closing balance 20,600 Actual closing balance (400) Interest received 20,200 Wk 8: Plant and machinery N'000 Opening balance 600,000 Disposal (40,000) Depreciation (100,000) Expected closing balance 460,000 Actual closing balance (660,000) Addition by cash (200,000) Wk 9: Disposal of plant N'000 Carrying amount 40,000 Proceeds from disposal 56,000 Profit on disposal of plant (16,000) Wk 10: Investment N'000 Opening balance 48,000 Gain on fair value of investment 8,000 Expected and actual closing balance 56,000 Wk 11: Retained earnings N'000 Opening balance 148,600 Profit for the year 296,000 Expected closing balance 444,600 Actual closing balance (244,600) Dividend declared and paid 200,000 29

Examiner’s report The question tests candidates’ knowledge of preparation of statement of cash flows of a single entity in accordance with provisions of IFRS 7, using direct method. Many candidates attempted the question and performance was average. The commonest pitfall of the candidates was their inability to correctly determine the cashflows from operating activities, using the direct method. Some of the candidates could not determine the cash received from customers, cash paid to suppliers as well cash paid for other operating expenses. Other candidates also used the indirect method despite the fact that the question specifically requests for the use of direct method and this led to loss of valuable marks. Candidates are advised to pay special attention to this area of the syllabus and other relevant sections for better performance in future examinations of the institute.

Marking guide Marks a) Preparation of statement of cash flows Title of the statement ¼ Determining cash received from customers 1¾ Determining cash paid to suppliers 2½ Determining cash paid to employees 1¾ Determining cash paid for other operating expenses 2 Determining net cash flows from operating activities 1¼ Determining cash flows from investing activities 1¼ Determining cash flows from financing activities 1 Stating cash and cash equivalents ¾ Workings notes for taxation paid 2¾ Workings notes for interest paid 1¼ Workings notes for cash purchase of plant and machinery 1½ Determining profit on disposal of plant 1 Determining gain on fair value of investment 1 Total 20 30

SECTION C

a) Bases of measurement:

i. Historical cost: Assets are measured at the amount of cash paid, or at the fair value of the consideration given to acquire them. Liabilities are measured at:

• the amount of proceeds received in exchange for the obligation (for example, bank loan or a bank overdraft), or

• the amount of cash that will be paid to satisfy the liability.

ii. Current cost or current value is the basis used in current value accounting/current cost accounting. Assets are measured at the amount that would be paid to purchase the same or a similar asset currently. Liabilities are measured at the amount that would be required to settle the obligation currently.

iii. Realisable value (or settlement value): This method of measurement is relevant when an entity is not a going concern and is faced with liquidation (and a forced sale of its assets). Assets are measured at the amount that could be obtained by selling them. Liabilities are measured at the amount that would be required to settle them currently.

iv. Present value. Assets might be measured at the value of the future net cash inflows that the item is expected to generate, discounted to a present value. Similarly, a liability might be measured at the discounted present value of the expected cash outflows that will be made to settle the liability.

b) Wadai Plc

i) Statement of profit or loss for the year ended December 31, 2022

Notes N'000 N'000 Revenue 4 40,000 Cost of sales: Opening inventory 7 1,000 Purchases 34,000 35,000 Closing inventory 6 (5,000) (30,000) Gross profit 5 10,000 Operating expenses (2,000) Net profit for the year 3 8,000 31 Wadai Plc ii) Statement of financial position as at December 31, 2022

Note N'000 Total non-current assets 50,000 Current assets: Inventory 5,000 Other current assets 65,000 Total current assets 2 70,000 Total assets 120,000 Equity and liabilities: Equity 1 40,000 Current liabilities 8 80,000 Total equity and liabilities 120,000 Working notes Wk 1: Determination of equity Non-current Equity assets = 5 4 = 50,000 Equity Equity = 50,000 x 4 = N40,000 5 Wk 2: Determination of total current assets Non-current assets Total current assets = 5 7 = 50,000 Total current assets Total current assets = 50,000 5 x 7 = N70,000 Wk 3: Determination of net profit Net Equity profit = 20% Net profit = 20% x Equity = 40,000 x 20% = N8,000 Wk 4: Determination of revenue Net Revenue profit = 20% Revenue = Net profit/20% = 8,000/0.20 = N40,000 Wk 5: Determination of gross profit Gross Revenue profit = 25% Gross profit = 25% x Revenue = 40,000 x 25% = N10,000 Wk 6: Determination of cost of sales Revenue – gross profit = cost of sales 32 N(40,000 – 10,000) = N30,000 Wk 7: Determination of opening inventory Cost of sales Av. inventory = 10 times Average inventory = 30,000/10times = N3,000 But average inventory = ½(opening inventory + closing inventory) 3,000 = ½(opening inventory + 5,000) 3,000 x 2 = opening inventory + 5,000 6,000 – 5,000 = opening inventory opening inventory = N1,000 Wk 8: Determination of current liabilities Current Equity liability = 50% Current liability = 40,000/0.5 = N80,000

Examiner’s report The question tests candidates’ knowledge of the bases of measurement in accordance with IASB Framework in part a, while part b requires candidates to prepare summarised statement of profit or loss and statement of financial position from various financial ratios by generating relevant figures for the financial statements from the interrelated financial ratios. Most of the candidates did not attempt this question and the few that attempted performed poorly. The main pitfall of the candidates was their inability to identify how these financial ratios are related and hence they could not use them to generate relevant figures for the purpose of preparing the summarised financial statements. Candidates should note that they are expected to be able apply accounting principles and theories at the skills level of the institute examination hence they are advised to emphasise the applications of the various accounting principles and theories in various sections of the syllabus. 33

Marking guide Marks Marks a) Explanation of four bases of measurement at 1 mark each 4 b)i Statement of financial position: Determining total current assets 1½ Determining equity 1½ Calculation of current liabilities 1½ Determining non-current assets 1 Derivation of closing inventory 1 Determining total assets and total liabilities ½ 7 b)ii Statement of profit or loss: Determination of revenue ½ Estimation of opening inventory 1½ Determination of cost of sales ½ Determination of gross profit 1 Determination of net profit ½ 4 Total 15

a) Ajorosun Investment Limited Computation of basic EPS and diluted EPS for the year 2021 and 2020 2021 2020 Earnings attributable to ordinary shareholders Weighted average number of ordinary shares Basic EPS = N3,600,000 N3,300,000 12,000,000 12,000,000 = N0.30 per share = N0.28 per share Diluted EPS = N70,000 Earnings for Basic EPS + X__ No. of shares for Basic EPS + Y N(3,600,000 + 140,000) (12,000,000+1,200,000) N3,740,000 13,200,000 shares = N0.28 per share N(3,300,000 + 140,000) (12,000,000+1,200,000) N3,440,000 13,200,000 shares = N0.26 per share Where: X = Interest savings (net of tax) on convertible bond that qualifies for dilution Y = No. of ordinary shares that would be exchanged for the convertible bond. 34 Working notes Test of dilution Incremental EPS = No. of ordinary Interest shares savings that would (net of be tax) exchanged on convertible for the stock convertible bond

(a) Interest savings (net of tax) Total interest = 5% x N4,000,000 = N200,000 Interest saving (net of tax) = N200,000 (1 – 0.3) = N200,000 (0.7) = N140,000

(b) No. of ordinary shares in exchange Conversion ratio: N100 bond = 30 shares N4m bond = N4,000,000/N100 x 30 shares = 1,200,000 shares Incremental N70,000 EPS = 1,200,000 N140,000 Potential shares: The number of potential shares is calculated using the conversion rate of 30 shares for every ₦100 of bonds. This is because this conversion rate produces more new shares than the other conversion rate of 25 shares for every ₦100 of bonds.

b) INTERNAL MEMO To: Board of Directors, Ajorosun Ltd From: Finance Manager Subject: Advantages and limitations of earnings Per Share (EPS) Date: 19 November, 2024 This memo aims to provide an overview of the advantages and limitations of Earnings Per Share (EPS) as a performance indicator for users of financial statements. Advantages of EPS

(i) Simplicity and comparability: EPS provides a straightforward measure of profitability on a per-share basis, allowing investors to easily compare the earnings performance of different companies within the same industry.

(ii) Decision-making tool for investors: Investors often use EPS as a key metric to evaluate potential returns, aiding in decision-making about buying, holding, or selling shares. = N0.12 per share. 35

(iii) Market sentiment indicator: A rising EPS trend indicates strong company performance, often leading to increased investor confidence and positive market sentiment.

(iv) Basis for valuation metrics: EPS is a core input in widely used valuation ratios like the Price-Earnings (P/E) ratio, helping investors assess the relative value of a company's stock.

(v) Trend analysis: It can be used to evaluate and compare the EPS of the same entity in different years. Thus, it is useful in trend analysis of an entity’s EPS.

(vi) Performance measurement: It measures performance from the perspectives of investors and potential investors

(vii) Earning distribution: It points out earnings distributable to the entity’s shareholders Limitations of EPS

(i) Ignores capital structure: EPS does not account for differences in capital structure, such as debt levels. Two companies with similar EPS but different risk profiles (e.g., high vs. low debt) may not be equally attractive.

(ii) Subject to accounting manipulation and window dressing: EPS can be manipulated through accounting practices, such as share buybacks or changes in depreciation methods, which may not reflect genuine operational improvements.

(iii) Fails to consider cash flows: EPS focuses solely on accounting profits, disregarding cash flows. This limits its usefulness for evaluating a company's ability to meet financial obligations or invest in growth.

(iv) Inflation: Inflation is not considered.

(v) Historical cost information: Historical information from the financial statement is used, hence it does not take cognizance of time value of money.

(vi) Differential in accounting policies: The choice of accounting policies affects EPS of an entity. While EPS is a widely recognised performance indicator, it should be used alongside other financial metrics to gain a more comprehensive understanding of a company’s financial health and prospects. Best regards, Finance Manager 36

Examiner’s report The question examines candidates’ knowledge of computation of basic and diluted earnings per share (EPS) and the advantages and limitations of the EPS as performance indicators to users of financial statements. Few candidates attempted the question and performance was below average. Most candidates could not correctly calculate the basic and diluted earnings per share (EPS). However, they were able to explain the advantages and limitations of the EPS as a performance indicator to users of financial statements. Candidates are advised to pay more attention to all areas of the syllabus most especially the relevant international accounting standards at this level of the institute examination.

Marking guide Marks Marks a) Calculation of basic and diluted earnings per share with comparative figures: Calculation of basic EPS and comparative figures 4 Calculation of diluted EPS and its comparative figures 4 8 b)ii Memo addressed to board of directors explaining advantages and limitations of EPS: Presentation of report in memo format 2 Explaining four (4) advantages at ½ mark each 2 Explaining three (3) limitations at 1 mark each 3 7 Total 15

a) Major inappropriate practices that can be discovered whilst reviewing your client's financial statements and accompanying analysis:

(i) Revenue recognition manipulation: This occurs when a company inflates its revenue by recognising sales that have not yet occurred or by recognising revenue prematurely. For instance, recording revenue from contracts that are not yet fulfilled violates the principle of revenue recognition. This misleads stakeholders about the company's financial performance and inflates profitability.

(ii) Understatement of liabilities or expenses: Companies may deliberately omit or understate liabilities (e.g., contingent liabilities) or fail to record expenses to enhance reported profitability or maintain compliance with 37 debt covenants. This distorts the financial position and may lead to inaccurate assessments of the company’s solvency.

(iii) Overstatement of asset values: Inflating the value of assets such as inventory, accounts receivable, or intangible assets, such as goodwill, can artificially improve a company's statement of financial position. This often involves using unrealistic assumptions or failing to account for impairments. Overstated assets mislead stakeholders about the true net worth and financial stability of the company.

(iv) Misclassification of expenses: Companies may intentionally misclassify operating expenses as capital expenditures to improve reported profitability. This inflates current period profits while understating actual costs. A company classifies routine repair and maintenance costs as improvements to non-current assets, which should be expensed in the income statement rather than capitalised on the statement of financial position. This misclassification distorts both the income statement and the statement of financial position misleading stakeholders about the company's operational efficiency and financial position.

(v) Window dressing of the year-end financial position Examples may include:

• Agreeing with customers that receivables are paid on shorter term around year end, so that trade receivables collection period is reduced and operating cash flows are enhanced.

• Modifying the supplier payment cycle by delaying payment normally made in the last month of the current year until first month of the following year. This will improve the cash position.

(vi) Exercise of judgement in applying accounting standards

• Reducing the percentage of outstanding receivables for which full provision is made.

• Extending useful life of property, plant and equipment to reduce depreciation charge hence inflating profit.

• Reducing the obsolence provision in respect of slow-moving inventories.

(vii) In-appropriate transactions recording Intentionally failing to correct a number of accounting errors aii) Identification and explanation of THREE fundamental ethical considerations that professional accountants should always consider.

• Integrity: Accountants must be honest and straightforward in all professional and business relationships. They should avoid falsifying records or participating in fraudulent reporting. This builds trust and ensures that financial reports are reliable for decision making. 38

• Objectivity: Accountants must not allow bias, conflicts of interest, or undue influence from others to override their professional judgment. For example, pressure from management should not compromise their assessments. Objectivity ensures fair and unbiased representation of financial data.

• Professional competence and due care: Accountants must maintain their knowledge and skills to provide competent services, ensuring they apply relevant laws, regulations and standards. This upholds the quality of financial reporting and aligns with stakeholders' expectations.

• Confidentiality: Professional accountants must respect the confidentiality of information obtained during their work. This means they should not disclose such information to third parties without proper authority or unless there is a legal or professional obligation to do so. Protecting sensitive client or company information builds trust between the accountant and stakeholders while ensuring compliance with legal and professional standards. An accountant working on an acquisition should not disclose financial details to external parties before the information is publicly announced.

• Professional behaviour: Accountants must comply with relevant laws and regulations and avoid actions that discredit the profession. This includes behaving ethically, maintaining transparency, and promoting public confidence in the profession. Upholding professional behaviour safeguards the reputation of the accounting profession and ensures high standards of practice. Avoiding involvement in tax evasion schemes or fraudulent activities even when pressured by management or clients.

b) Reasons why the comparison of primary financial statements is problematic for users despite the global adoption of IFRS

(i) Differences in application of IFRS: While IFRS provides a global framework, companies in different jurisdictions may interpret or apply the standards differently due to variations in regulatory guidance or enforcement mechanisms. This creates inconsistencies in financial reporting, making comparisons less reliable.

(ii) Impact of judgment and estimates: IFRS requires the use of professional judgment in areas like asset valuation, impairment and revenue recognition. Subjective estimates can differ significantly between companies. Users may find it challenging to identify whether differences are due to operational realities or varying interpretations of IFRS. 39

(iii) Local laws and cultural influences: Despite IFRS adoption, local laws, tax systems, and cultural practices may influence how companies prepare and disclose financial statements. For example, taxation rules can affect reported profits differently across regions. This can reduce comparability even when companies report under the same IFRS standards.

(iv) Impact of different economic environments: Companies operating in diverse countries face varying economic environments, such as inflation rates, exchange rates and interest rates. These differences can significantly influence financial results and ratios, making direct comparisons between companies challenging. A company operating in a high-inflation economy may show distorted asset values or costs compared to a company in a low-inflation economy, despite similar operational performance.

(v) Use of management estimates and judgments: Financial statements often rely on management's estimates and judgments, such as in valuing inventory, calculating depreciation, or assessing impairment. These subjective decisions can vary widely between companies, even within the same industry, affecting comparability. One company may use aggressive assumptions for revenue recognition, while another applies conservative assumptions, leading to different reported earnings despite similar underlying operations.

(vi) Different accounting policies: There is still flexibility allowed in the choice of accounting policies adopted by companies. One important choice involves the option to revalue PPE. This will have an impact on assets and equity values in the financial statements (statement of financial position) and also the amount of depreciation in the statement of profit or loss.

(vii) Different format of financial statements: A characteristic of IFRS is that it is flexible in terms of how statements are presented. All statements required minimum disclosures but do not specify precise formats. Furthermore the statement of profit or loss can be presented in different formats (by function or by nature) making comparison particularly difficult.

(viii) Different year-ends: Company may prepare their financial statements at any month end of their choice. Some companies involved in seasonal trading may chose a year end that presents a more favourable impression of their financial position than is typical for the year, others may not. These factors highlight the inherent challenges in achieving full comparability of financial statements, even under global accounting standards like IFRS. 40

Examiner’s report The question tests candidates’ knowledge of possible inappropriate practices that could exist in financial statements when carrying out its review. The question also requires candidates to identify and explain fundamental ethical considerations which professional accountants should always consider as well as to state the reasons why comparison of primary financial statements is problematic to users despite the global adoption of IFRS. Most candidates attempted the question and performance was average. Majority of the candidates were able to identify and explain major inappropriate practices when reviewing financial statements. They could also clearly state the fundamental ethical considerations that professional accountants should always consider. However, only few of them could state the reasons why comparison of primary financial statements is problematic to users. Candidates are advised to ensure to cover all sections of the syllabus for better performance in future examinations of the institute.

Marking guide Marks Marks a)i Identification and explanation of three (3) major inappropriate practices at 1½ mark each 4½ ii Identification and explanation of three (3) fundamental ethical considerations that professional accountants should always consider at 1½ marks each 4½ 9

b) Stating three (3) reasons why comparison of primary financial statement is problematic for users at 2 marks each 6 Total 15 41 ICAN/251/Q/B1 Examination No..................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA