Financial Reporting · May 2025

(a) Chukwuka Nigeria Limited Statement of cash flows for the year ended April 30, 2025 Operating activities: N’Million N’Million Profit before taxation 18,315 Adjustments: Finance cost 5,220 Interest (1,670) Profit on investment disposal (385) Loss on disposal 1230 Depreciation (w4) 6,690 Insurance Premium (58) 11,027 Changes in working capital/operating assets and liabilities Increase in inventories (11,550 - 7,875) (3,675) Increase in receivables (31,440 – 25,335) (6,105) Increase in payables (12,810 – 9,150) 3,660 (6,120) Cashflow from operating activities 23,222 Less tax paid (w5) (10,320) Net cash flow from operating activities 12,902 Investing activities Interest received 1,670 Proceeds from investment disposal (w7) 1,885 Proceeds from van disposal (w8) 2,520 Acquisition of PPE (w6) (14,115) Acquisition of intangible assets (w10) (2,475) Acquisition of investment (w9) (475) Net cash flow from investing activities (10,990) Financing activities Finance cost (5,220) Proceeds from share issue- share capital (w11) 3,750 Share premium (w12) 1,200 Dividend paid (w1) (5,400) Proceeds from loan note issued (w2) 6,280 Net cashflow from financing activities 610 Net cashflow for the year 2,522 Net cashflow at the beginning of the year (4,380) Net cashflow at the end of the year (w3) 1,858 14

Workings: W1 Retained earnings N’M N’M Cash dividend 5,400 Bal b/f 13,860 Bal c/d 17,925 SOPL 9,465 23,325 23,325 W2 10% Loan notes N’M N’M Bal c/d 12,780 Bal b/f 6,500 ______ 6,280 12,780 12,780 W3 Cash and cash equivalents as at April 30, 2025 N’M Short term investments 3,810 Cash in hand 930 Bank overdraft (6,540) Insurance premium (58) 1,858 W4 Accm. depreciation account N’M N’M Disposal 2,850 Bal b/f 22,320 Bal c/d 26,160 SOPL 6,690 29,010 29,010 W5 Tax payables N’M N’M Cash 10,320 Bal b/f (IT) 8,460 Bal c/d (IT) 9,240 (DT) 3,750 (DT) 1,500 SOPL 8,850 21,060 21,060 W6a PPE accounts N’M N’M Bal b/f 23,475 Disposal 3,750 Rev. Res. (w6b) 2,085 Depreciation 6,690 Cash 14,115 Bal c/d 29,235 39,675 39,675 15 W6b Revaluation reserve N’M N’M Bal c/d 11,280 Bal b/f 9,195 ______ PPE (w6a) 2,085 11,280 11,280 W7 Investment disposal N’M N’M Investment 1,500 Cash 1,885 SOPL 385 _____ 1,885 1,885 W8 Van disposal account N’M N’M Cost 6,600 Van acc. Dep 2,850 Cash 2,520 _____ SOPL 1,230 6,600 6,600 W9 Trade investment N’M N’M Bal b/f 2,860 Disposal 1,500 Cash 475 Bal c/d 1,835 3,335 3,335 W10 Intangible assets N’M N’M Bal b/f 16,300 Bal c/d 18775 Cash 2,475 ______ 18,775 18,775 W11 Ordinary share capital N’M N’M Bal c/d 15,000 Bal b/f 11,250 ______ Cash 3,750 15,000 15,000 16 W12 Share premium N’M N’M Bal c/d 10,500 Bal b/f 9,300 ______ Cash 1,200 10,500 10,500

(b) In the context of IAS 7, cash and cash equivalents can be explained as follows: Cash is cash in hand and deposit at bank while cash equivalent is defined as short term highly liquid investment that can be converted to a known amount of cash and is subject to an insignificant risk of changes in value. Examples are:

i. Cash in hand; ii. Cash at Bank; iii. Bank overdraft; and iv. Short term investment with a maturity day of not more than 90 days.

(c) Exceptions to the rule regarding off setting provided by IAS 1 are stated below: According to the provision of IAS 7, the following cash flows can be off setting or reported on a net basis:

i. Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity;

ii. Cash receipts and payments for items in which the turnover is quick, the amounts are large and the maturities are short. An example of cash receipts and payments that may be off-set would be the purchase and sale of short- term investments by an entity who trades in them frequently, such as a bond trading fund that turns over its portfolio every 1 to 2 weeks;

iii. For a financial institution, transactions to be off set or presented on a net basis is, cash receipts and payments for deposits and cash receipts and payments for loans and advances;

iv. In IAS 12, deferred tax assets and liabilities are offset if, and only if, the entity has a legally enforceable right to offset current tax assets and current tax liabilities; and

v. In IAS 32, Offsetting assets and liabilities occurs when financial instruments have legally enforceable rights to be netted, resulting in a single net amount being presented in the statement of financial position. This is permitted or required when the net amount fairly represents the entity's position. 17

Examiner’s report The question tests candidates’ knowledge of the preparation of cash flows using indirect method and in accordance with the provisions of IAS 7- Statement of Cash flows, candidates were also required to explain the term cash and cash equivalents and to also state the exceptions to rules of off-setting as stipulated by IAS 1- Presentation of Financial Statements. Majority of the candidates attempted the question but performance was below average The common pitfalls include the following: Inability to correctly treat the cash payments in respect of insurance premium; Wrong classifications of transaction into the three major classes of investing, financing and operating activities; and Failure to be able to state exception to the rules of off-setting assets and liabilities in accordance with the provisions of IAS 1. Candidates are advised to pay attention to all aspects of the preparation of final accounts of limited liability companies as the examiner will always examine this area of the syllabus as a compulsory question at the skills level of the Institute’s examination.

Marking guide Marks Marks 1a. Preparation of cash flow statement: Stating title of the statement ¼ Stating profit before taxation and adjustments 3½ Calculating changes in working capital 3 Statement of the net cash flow from operating activities ½ Stating cash flows from investing activities 3½ Determining the net cash flow from investing Activities ½ Stating cash flows from financing activities 2½ Determining the net cash flow from financing Activities ½ Determining the cash and cash equivalents 2 Sundry workings for cash flow items 3¾ 20

b. Explanation of cash and cash equivalents: Correct explanation of cash and cash equivalents 2 Two correct examples of cash and cash equivalents 2 4 18

c. Exception to the rule of off setting assets and liabilities as provided in IAS 1 Any four exceptions to the rule 6 Total 30

Odot Ventures Nigeria Ltd

(a) Ratio analysis Ratios 2024 2023 Gross profit margin Gross profit × 100 Revenue ₦17,920 × 100 ₦44,800 = 40.00% ₦8,640 × 100 ₦14,400 = 60.00% Net profit margin Net profit before tax × 100 Revenue ₦4,960 × 100 ₦44,800 = 11.07% ₦4,832 × 100 ₦14,400 = 33.56% Return on capital employed PBIT Capital employed ₦8,032 × 100 ₦45,872 = 17.51% ₦5,024 × 100 ₦16,464 = 30.51% Current ratio Current assets Current liabilities x 100 ₦13,136 ₦2,976 = 4.41:1 ₦2,000 ₦576 = 3.47:1 Acid test ratio Current assets less closing Inventory Current liabilities ₦2,000 - ₦480 576 = 2.64 :1 Receivables collection period Receivables × 365 days Revenue ₦13.134 -3,808 ₦2,976 = 3.13 :1 ₦9,328 × 365 ₦44,800 = 76 days ₦1,328 × 365 ₦14,400 = 34 days 19

(b) Evaluation of financial performance and position of Odot Ventures Nigeria Limited for the year ended December 31, 2024

i. In 2024, Odot Ventures Nigeria Limited implemented significant strategic changes under a new sales manager, including a low-price, high-volume approach and extended credit terms to customers. These changes led to a remarkable increase in revenue from ₦14.4 billion in 2023 to ₦44.8 billion in 2024. However, the company’s profitability weakened. The gross profit margin dropped from 60% in 2023 to 40% in 2024, indicating reduced pricing power due to lower selling prices. Similarly, the net profit margin fell from 33.56% to 11.07%, suggesting higher operating and financing costs.

ii. Return on capital employed (ROCE) also declined significantly from 30.51% to 17.51%, showing that the company became less efficient in generating profit from the capital it employed. This was largely due to a major increase in borrowings from ₦1.6 billion to ₦25.6 billion, used to finance asset expansion. Consequently, interest expense surged from ₦192 million to ₦3.072 billion, further impacting net profitability.

iii. Despite this, the company's liquidity position improved. The current ratio increased from 3.47:1 to 4.41:1, and the acid test ratio rose from 2.64:1 to 3.13:1, indicating strong short-term solvency. However, the receivables collection period lengthened to 76 days, which could delay cash inflows and strain working capital, especially given the high levels of trade receivables.

iv. In conclusion, while the new policies increased sales and improved liquidity, they compromised profitability and introduced financial risk through increased debt and slow receivables turnover. Management must focus on improving margins, reducing debt, and tightening credit control.

c) Amount of cash to be realised if the company imposed 45 days credit period. Method 1, Receivable collection period in year 2024 is 76 days with total receivable of N9,328million If the collection period is reduced to 45 days. The new receivable figure would be: 45/76 x N9,328million = N5,523million The amount of cash that would be realised = (N9,328m – N5,523m)= N3,805m 20 Method 2 With imposition of 45 days 45days = y/(44,800) x 365days 45days= 365y/ 44,800 y = 45 x 44,800/365 hence y = 2,016,000/365 = N5,523million amount of cash to be realised is (N9,928m – N5,523m) = N3,805m where y is the amount of receivable collection period in 45days.

Examiner’s report The question tests candidates’ knowledge of computation of ratios and its interpretation as well as the application of working capital management. Most of the candidates attempted the question and their performance was above average. Many of the candidates were able to correctly calculate the relevant ratios, however some of them were unable to interpret correctly the ratios calculated. Almost all the candidates that attempted the question could not correctly determine the amount of cash that would be realised if the company reduced its debt collection period from 76days to 45days Candidates are advised to cover all sections of the syllabus and make use of the institute study texts for better performance in future examinations.

Marking guide Marks Marks a. Calculation of financial ratios Stating correct formula of gross profit margin ¼ Correct calculation of gross profit margin ¾ Stating correct formula of net profit margin ¼ Correct calculation of net profit margin ¾ Stating correct formula of ROCE ¼ Correct calculation of ROCE ¾ Stating correct formula of current ratio ¼ Correct calculation of current ratio ¾ Stating correct formula of acid test ratio ¼ Correct calculation of acid test ratio ¾ Stating correct formula of receivable collection period ¼ Correct calculation of receivable collection period ¾ 6 21

b. Evaluation of financial performance and position: Analysis using revenue, gross profit margin and net profit margin data/ information. 2 Analysis using return on capital employed and long term borrowings data/information. 2 Analysis using current ratio, acid test ratios and receivables collection period data/information. 2 Conclusion on financial performance and position. 1 7

c. Calculation of the amount of cash realisable if debt collection period is imposed at 45 days Correct step by step calculations of cash realisable 7 Total 20

(a) Non-controlling Interest (NCI) ₦’M NCI value at acquisition 332 NCI share of post-acquisition reserves (25% x (1,392 – 1,184) 52 Impairment – NCI share (80 ÷ 0.25) x 25%) (80) 304

(b) Goodwill ₦’M Parent holding at fair value: Cash (75% x 320m x N3.50) 840 Deferred consideration (432 x 1/1.08) 400 1,240 NCI value at acquisition 332 1,572 Less fair value of net assets at acquisition (w3) (1,184) Goodwill 388 Impairment (N80 ÷ 0.25) (320) Goodwill after impairment 68

(c) Consolidated reserves:

(i) Consolidated retained earnings ₦’M Parent 1,400 Add: Interest receivable (240 x 10%) 24 22 Less: Unwinding of discount on deferred consideration (400 x 8%) or (N432 – 400) (32) Workings (w3) 1,392 Subsidiary – group share of post acquisition (Land and building in revaluation reserves) (1,392 -1,184-16) x 75%) 144 Less impairment of goodwill (320 x 75%) (240) 1,296

(ii) Consolidated share premium Mana Plc 320

(iii) Consolidated revaluation reserve Mana Plc 180 Subsidiary – post-acquisition (75% x 16m) 12 192

Workings:

1. Group structure Mana Plc 75% 1/1/2023 Bakus Plc

2. Unrealised profit in inventory (1/3 x N24m Profit) = N8 million

3. Net assets At acquisition At reporting period end N’M N’M Share capital 320 320 Share premium 160 160 Retaind earnings 536 840 1,016 1,320 Fair value adjustments: Land and buildings 80 80 Branding (Agric-equip) 160 160 Revaluation - 16 23 Brand amortisation - (16) Research and development (72) (160) Unrealised profit - ___(8) 1,184 1,392

Examiner’s report The question test candidates’ knowledge of group financial statements, however the examiner decided not to test full preparation of consolidated financial statements, rather candidates were required to calculate the following components of the consolidated financial statements: Non-controlling interests, goodwill and consolidated reserves (share premium, revaluation reserves and retained earnings). Few candidates attempted the question and their performance was below average. The commonest pitfall was their inability to calculate the components of the consolidated financial statements. Although, most candidates are quite familiar with the preparation of group financial statements, however candidates are advised to pay more attention to the applications of consolidation principles for better performance in future examinations.

Marking guide Marks Marks 3a. Calculation of non-controlling Interest (NCI) Determination of group structure ¾ Calculation of unrealised profit in inventory ½ Stating, non controlling interest at acquisition date ¼ Determination of NCI share of post acquisition reserve 1¾ Determination of NCI share of goodwill payment ¾ 4

b. Calculation of Goodwill on acquisition Determining the cash consideration ½ Determining the deferred consideration ½ Stating Non-controlling interest at acquisition ¼ Determining of subsidiary’s net asset at acquisition 2 Determination of total impairment of goodwill ½ Stating the value of goodwill after impairment ¼ 4

c. Calculation of consolidated reserves Stating the consolidated share premium ½ Determining the consolidated revaluation reserve 1½ Stating the parents retained earnings ¼ Determining the interest receivable ¾ Determining/unwinding of discount on deferred Consideration ¾ 24 Determining group share of post acquisition reserves 4 Determining group share of goodwill impairment 2 Stating consolidated retained earnings ¼ Sundry relevant workings for retained earnings 2 12 Total 20

(i) Adanna Nigeria Limited Non-current assets movement schedule for the year ended December 31, 2023 Cost/valuation Freehold properties Plant and machinery Motor vehicles Construction work in progress Total N’000 N’000 N’000 N’000 N’000 1/1/2023 480,000 520,000 108,600 250,000 1,358,600 Addition - 96,000 - 180,000 276,000 Reclassification 320,000 - - (320,000) - Disposal - (128,000) (42,000) - (170,000) Revaluation reserve (50,000) ________ _______ ________ (50,000) 31/12/2023 750,000 488,000 66,600 110,000 1,414,600 Acc depreciation: 1/1/2023 - 208,000 48,870 - 256,870 Charge for the year 30,000 97,600 9,990 - 137,590 Disposal ______ (51,200) (18,900) _______ (70,100) 31/12/2023 30,000 254,400 39,960 - 324,360 Carrying Amount 31/12/2023 720,000 233,600 26,640 110,000 1,090,240 1/1/2023 480,000 312,000 59,730 250,000 1,101,730

Workings: W1. Revaluation difference N’million Building valuation – 1/1/2023(480 – 136) 344 Less Dep (344/20 x 1) (17.2) Carrying amount 326.8 Revalued amount (276.8) Revaluation deficit (50) W2. Depreciation on new building 320/25 12.8 Total depreciation on building (17.2+12.8) 30.0 25 W3. Depreciation on plant and machinery 20% x 488,000 97,600 W4. Depreciation on motor vehicles (15% x 66,600) 9,990 W5. Accumulated depreciation on disposal of assets Plant and machinery (20% x 128,000 x 2) 51,200 Motor vehicle (42,000 – 23,100) 18,900

(ii) Statement of changes in equity for the year ended December 31, 2023 Share capital Share premium Retained earnings Revaluation reserves Total N’000 N’000 N’000 N’000 N’000 Bal b/f 100,000 266,000 489,700 185,000 1,040,700 Profit for the year - - 208,660 - 208,660 Dividend paid - - (28,000) - (28,000) Rev deficit - - - (50,000) (50,000) Proceeds from share (w1) 25000 4,000 - - 29,000 Redeemable pref. share redemption - 22,000 - - (22,000) _______ _______ ________ ________ _________ Balance c/f 125,000 248,000 670,360 135,000 1,178,360 Workings: N’000 W1 Split of proceeds from right issue Share capital (1/4 x N50x100,000/N0.5) 25,000 Share premium (1/4 x 40.08 x (109,000/N.5) 4,000

(iii) Uses of share premium

i. It can be used to create bonus issue ii. It can be used to take care of transaction costs on shares issue iii. It can be used to settle underwriting costs iv. It can be used for premium of redemption of shares and bonds v. It can be used to create any other reserves e.g debenture redemption reserves fund etc,

Examiner’s report The question test candidates’ knowledge of preparation of non- current assets schedule normally included in notes to financial statement in annual reports of companies as well as preparation and presentation of statement of changes in equity and use of share premium. Most candidates attempted the question and their performance was average 26 Majority of the candidates were able to prepare the statement of changes in equity and they also correctly highlighted the uses of share premium. However, most of them could not correctly calculate the costs, revaluation amount, accumulated depreciation and carrying amount for the preparation of the non- current assets schedule. Candidates are advised to pay more attention to all sections of the syllabus, they should also make use of the Institute’s pathfinder and study texts for better performance in future examination.

Marking guide Marks Marks i. Preparation of non-current assets schedule: Stating the title of the schedule ¼ Stating the cost/valuation of the non-current assets 1 Determining the additions in the year ¾ Stating the reclassification of asset ½ Calculating the disposal in the year ¾ Determining the revaluation reserve 2 Stating the total cost/valuation of non-current assets 1 Determining the accumulated depreciation on non- current assets ¾ Determining depreciation charged for the year 2½ Calculating accumulated depreciation on disposal 1½ Determining the total accumulated depreciation at year end 1 Stating carrying amount at year end 1 13

ii. Presentation of statement of changes in equity: Stating the title of the statement ¼ Stating the balance brought down 1¼ Recording the profit for the year ½ Determining the dividend paid ½ Calculating the revaluation deficit or loss ½ Determining the proceed from issue of shares at premium ¾ Calculating the premium used on redemption preference share ½ Stating the balance carried forward ¾ 5

iii. Uses of share premium Any four uses 2 Total 20 27

(a) The following are the criteria to be met before assets can be classified as held for sale or discontinued operations in accordance with IFRS 5:

(i) The asset must be available for immediate sales in its present condition;

(ii) Management must be committed to a plan to sell it;

(iii) There must be active programme in locating a buyer;

(iv) The assets must be marketable at a price reasonable to its current fair value;

(v) The sale of the assets is expected to take place within one year from the date of the classification;

(vi) It is unlikely that a significant change will be made to such plan or that such plan will be withdrawn by the entity; and

(vii) The sale of the assets must be probable.

(b) Abia Ltd Statement of profit or loss for the year ended October 31, 2024 2024 2023 N’000 N’000 Continuing operations: Revenue 150,000 132,000 Cost of sales (117,000) (102,000) Gross profit 33,000 30,000 Operating expenses (6,600) (3,000) Profit/(loss) from continuing operations 26,400 27,000 Profit/(loss) from discontinued operations (24,000) 9,000 Profit for the year (w1) 2,400 36,000 Notes: W1) Analysis of discontinued operations 2024 2023 N’000 N’000 Revenue 84,000 108,000 Cost of sales (99,000) (90,000) Gross profit/(loss) (15,000) 18,000 Operating expenses (9,000) (9,000) Profit/(loss) (24,000) 9,000 28

Examiner’s report The question tests candidates’ knowledge of the provisions and application of IFRS 5- Assets Held for Sale and Discontinued Operations. Majority of the candidates attempted the question and performance was below average The commonest pitfall was the inability of the candidates to prepare summarised statement of profit or loss showing continuing and dis-continuing operations as required by IFRS 5. Candidates are advised to pay more attention to all statement of accounting standards that are examinable at this level of the institute’s examination, for better performance in future.

Marking guide Marks Marks a. Explanation of criteria to be met before assets can be classified as held for sale: Stating any five criteria 5

b. Preparation of summarised statement of profit or loss for the year ended October 31, 2024. Stating the title of the statement ½ Stating the revenue for the year 1 Determining the gross profit 2 Stating the operating expenses 1 Calculating the profit from continuing operations 1 Determining the profit from discontinued operations 1 Stating the profit for the year 1 Analysis of discontinued operations 2½ 10 Total 15

(a) Core Principle IFRS 15 is based on a core principle that requires an entity to recognise revenue: In a manner that enables the transfer of goods or services to customers at an amount that reflects the consideration of the entity expects to be entitled to in exchange for the goods or services. 29

(b) Combination of contracts Two or more contracts entered into at or near the same time with the same customer (or related parties) must be combined and treated as a single contract if one or more of the following conditions are present:

(i) the contracts are negotiated as a package with a single commercial objective; (ii) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or (iii) the goods or services promised in the contracts (or some goods or services promised in the contracts) are a single performance obligation.

(c) Application Criteria The general IFRS 15 model applies only when or if:

(i) the parties have approved the contract and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights; (iii) the entity can identify the payment terms for the goods and services to be transferred; (iv) the contract has commercial substance (i. e it is expected to change the risk, timing or amount of an entity’s future cash flows); and (v) it is probable that the entity will collect the consideration.

(d) Performance obligation in relation to distinct goods and services At the inception of a contract, the entity must assess the goods and services promised in a contract and identify as a performance obligation each promise to transfer to the customer either:

(i) a good or service (or a bundle of goods or services) that is distinct or

(ii) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (described by reference to promises satisfied over time, and progress to completion assessment). A good or service is distinct if both of the following criteria are met:

(i) the customer can benefit from the goods or service either on its own or together with other resources that are readily available to the customer; and

(ii) the entity’s promise to transfer the goods or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, it must be combined with other promised goods or services until a bundle of goods or services that is 30 distinct can be identified. This could mean that all of the goods or services promised in a contract might be accounted for as a single performance obligation. This sounds quite complicated but simply means that at the inception of a contract an entity must determine whether the contract is for sale of a single deliverable or several deliverables. This is important as revenue is recognised as these separate goods and services are delivered to the customer.

(e) Step 3 to 5 of the IFRS 15, 5 step Model Step 3: Determine the transaction price

i. The transaction price is the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract, excluding any amounts collected on behalf of third parties (for example, sales taxes).

ii. The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price. An entity must consider the effects of other factors when determining the transaction price including:

• Variable consideration (including the constraining estimates of variable consideration); and

• Time value of money; Step 4: Allocate the transaction price to the performance obligations

i. The objective is to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

ii. The transaction price is allocated to each performance obligation in proportion to those stand-alone selling prices determined at the inception of the contract.

iii. A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

iv. When the sum of the stand-alone selling prices of goods or services promised in a contract exceeds the promised consideration the customer is receiving a discount. The discount should be allocated entirely to one or more (but not all) performance obligations in the contract if all of the following criteria are met:

• each distinct good or service (or each bundle of distinct goods or services) in the contract is sold regularly on a stand-alone basis; 31

• a bundle (or bundles) of some of those distinct goods or services are sold regularly at a discount to the stand-alone selling prices of the goods or services in each bundle; and

• such discounts are substantially the same as the discount in the contract. Step 5: Recognise revenue when or as an entity satisfies performance obligation

i. Revenue is recognised when (or as) a company satisfies a performance obligation by transferring a promised good or service to a customer. The amount of revenue recognised is the amount of the transaction price allocated to the performance obligation.

ii. Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). An asset is transferred when (or as) the customer obtains control of that asset. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.

iii. A performance obligation might be satisfied (i.e., goods and services might be transferred):

• over time (in which case revenue would be recognised over time); or

• at a point in time (in which case revenue is recognised at that point in time).

Examiner’s report The question tests candidates’ knowledge of the principles and provisions of IFRS 15 - Revenue from Contracts with Customers. Most of the candidates attempted the question and performance was above average Although some candidates were able to explain, lists the conditions and criteria highlighted in the accounting standards, most of them were however, unable to highlight the element of the core principle of IFRS 15. Candidates should pay attention to all sections of the syllabus and also ensure that they understand the provisions and applications of all relevant accounting standards at the skills level of the institute’s examination.

Marking guide Marks Marks a. Core principles of IFRS 15 Stating one correct element of IFRS 15 core principles 1 b. Conditions for combination of contracts 32 Stating any two correct conditions 2 c. Conditions for Application Criteria of IFRS 15 Stating any three conditions for application of IFRS 15 3 d. Explanation of the criteria for goods or services to be considered distinct Explaining any four criteria 4

e. Explanation of steps 3 to 5 of IFRS 15, Steps model Correct explanation of step 3 1 Correct explanation of step 4 2 Correct explanation of Step 5 2 5 Total 15

(a) Provisions

i. According to IAS 37, provisions are liabilities of uncertain timing or amount. A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

ii. Provisions differ from other liabilities because there is uncertainty about the timing or amount of the future cash flows required to settle the liability.

iii. A provision should be recognised when:

• a company has a present obligation (legal or constructive) as a result of a past event;

• it is probable that an outflow of economic benefits will be required to settle the obligation; and

• a reliable estimate can be made of the amount of the obligation. If one of these conditions is not met, then a provision cannot be recognised.

iv. The amount recognised as a provision must be the best estimate, as at the end of the reporting period, of future expenditure required to settle the obligation.

v. The estimates of the outcome and financial effect of an obligation are made, by management, based on judgement and experience of similar transactions and perhaps report from independent experts. 33

vi. Uncertainties about the amount to be recognised as a provision are dealt with by various means according to the circumstance. For instance, in measuring of single obligation, the best estimate of the liability may be the most likely outcome. Contingent liabilities

i. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events, not wholly within the control of the entity.

ii. A contingent liability is one that does not exist at the reporting date but may do so in the future, or it is a liability that exists at the reporting date but cannot be recognised because it fails one of the IAS 37 recognition criteria.

iii. Contingent liabilities are not recognised as liabilities because they are either possible or present obligations but a sufficiently reliable estimate of the amount of the obligation cannot be made.

iv. Contingent liabilities are not recognised in the financial statements. In some circumstances, information about the existence of a contingent liability should be disclosed in the notes to the financial statements.

v. The standard provides that contingent liabilities should be disclosed unless the possibility of any outflow in settlement is remote. Contingent assets

i. A Contingent asset is a possible asset that arises from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events. A contingent asset might be a possible gain arising from an outstanding legal action against a third party. The existence of the gain (the money receivable) will only be confirmed by the outcome of the legal dispute.

ii. Contingent assets are not recognised in the financial statements. In some circumstances, information about the existence of a contingent asset should be disclosed in the notes to the financial statements.

iii. The standard provides that contingent assets should be disclosed only if an inflow in settlement is probable. IAS 37 defined “probable” as more likely than not.

iv. Where disclosure of a contingent asset is appropriate, the following disclosures are required:

• A brief description of the nature of the contingent asset. 34

• Where applicable, an estimate of its financial effect and an indication of the uncertainties.

(b) Sources of regulation The main sources of regulation are:

• Accounting standards;

• Company law;

• Sectoral regulations; and

• The listing rules of the relevant stock exchange, for listed companies, Accounting standards are authoritative statements of how particular types of transactions and events are reflected in the financial statements. International Financial Reporting Standards are used in Nigeria. Company law varies from country to country, but typically, it also sets out rules for determining profits available for distribution, issuing and redeeming share capital, the reserves that a company must have and the uses to which they can be put. These matters are not covered in accounting standards. The main company law statute in Nigeria is the Companies and Allied Matters Act 2020. Sectoral regulation may apply to certain industries, for example, the banking sector is regulated by the Central Bank of Nigeria, insurance sector by the National Insurance Commission and pension by the Pension Commission. Such regulations may specify peculiar financial reporting requirements of the sectors. For example, in Nigeria, the Central Bank prudential guidelines override impairment provision of IFRS 9. Listing rules set out the information which entities must supply when their shares are traded on a major stock market. They must comply with these rules in order to maintain their listing. These rules include requirements relating to information, including financial reports that entities must prepare and provide to the stock market while they are listed.

Examiner’s report The question is in two parts, part (a) requires the candidates to explain the basic terms, recognition and measurement criteria of provisions, contingent liabilities and contingent assets in accordance with IAS 37. Part (b) is on explanation of sources of accounting regulations in Nigeria. Few candidates attempted the question and performance was poor. 35 Some candidates were able to explain the sources of accounting regulations in Nigeria. However, majority of them could not answer the part (a) of the question very well and this led to loss of marks. Candidates are advised to cover all sections of the syllabus for better performance in future examinations of the institutes.

Marking guide Marks Marks a. Explanation of terms – Provisions, contingent liabilities and contingent assets stating recognition and measurement criteria (i) Provisions Correct explanation of provision 1 Any three points on recognition and measurement of provisions 3

(ii) Contingent liabilities Correct explanation of contingent liabilities 1 Any three points on recognition and measurement of contingent liabilities 3

(iii) Contingent assets Correct explanation of contingent assets 1 Any three points on recognition and measurement of contingent assets 3 12

b. Sources of Accounting regulation in Nigeria Explaining any three sources 3 Total 15 36 ICAN/252/Q/B1 Examination No..................... INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA