Financial Reporting · May 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