Financial Reporting · November 2024

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