Public Sector Accounting and Finance · 2022

Ojaja Federal Republic Preparation of proposed budgeted estimates for 2021 to 2023 Sector code Sector name 2020 2020 2021 2022 2023 Actual estimates Approved estimates Proposed estimates Proposed estimates Proposed estimates N’000 N’000 N’000 N’000 N’000 01 Administrative sector Personnel cost 40,000.00 34,000.00 39,100.00 44,965.00 51,709.75 Overhead cost 25,000.00 21,250.00 24,437.50 28,103.13 32,318.60 Consolidated revenue charges 18,600.00 15,810.00 18,181.50 20,908.73 24,045.04 Capital expenditure 62,400.00 53,040.00 58,344.00 64,178.40 70,596.24 Sub-total 146,000.00 124,100.00 140,063.00 158,155.26 178,669.63 02 Economic sector Personnel cost 22,500.00 20,250.00 25,312.50 31,640.63 39,550.78 Overhead cost 12,600.00 11,340.00 10,773.00 10,234.35 9,722.63 Consolidated revenue charges 28,600.00 25,740.00 32,175.00 40,218.75 50,273.44 Capital expenditure 41,300.00 37,170.00 46,462.50 58,078.13 72,597.66 97 Sub total 105,000.00 94,500.00 114,723.00 140,171.85 172,144.51 03 Law and justice sector Personnel cost 15,800.00 15,800.00 17,380.00 19,118.00 21,029.80 Overhead cost 20,200.00 20,200.00 19,190.00 18,230.50 17,318.98 Consolidated revenue charges 17,500.00 17,500.00 16,625.00 15,793.75 15,004.63 Capital expenditure 38,500.00 38,500.00 36,575.00 34,746.25 33,008.94 Sub total 92,000.00 92,000.00 89,770.00 87,888.00 86,362.34 04 Sub total Personnel cost 40,800.00 38,760.00 42,636.00 46,899.60 51,589.56 Overhead cost 22,200.00 21,090.00 23,199.00 25,518.90 28,070.79 Consolidated revenue charges 16,700.00 15,865.00 13,485.25 11,462.46 9,743.09 Capital expenditure 32,300.00 30,685.00 33,753.50 37,128.85 40,841.74 Sub total 112,000.00 106,400.00 113,073.75 121,009.81 130,245.18 Summary of total expenditure by sectors Personnel cost 119,100.00 108,810.00 124,428.50 142,623.23 163,879.89 Overhead cost 80,000.00 73,880.00 77,599.50 82,086.88 87,431.00 Consolidated revenue charges 81,400.00 74,915.00 80,466.75 88,383.69 99,066.20 Capital expenditure 174,500.00 159,395.00 175,135.00 194,131.63 217,044.57 Total 455,000.00 417,000.00 457,629.75 507,225.42 567,421.66

(b) Explanation of National Chart of Accounts (NCOA) in relation to budget structure i. Functional segment: The functional classification or classification by functions of government is a detailed classification of the functions or a socio-economic objective, that government unit aims to achieve through various outlays. It therefore, organises government activities according to their broad objectives or purposes. 98

ii. Programme segment: The programme classification identifies various set of activities to meet specific policy objectives of the government e.g. Pre- primary education, poverty alleviation and food security.

iii. Geographical segment: The geographical classification is used to identify the geographical location of an entity (MDAs)or a project so that an analysis of government budget along various zones, states and local government areas in the country can be done.

(c) Steps required for budgeting with the National Chart of Accounts

i. Identify the government institutions (cost and revenue centres) from the hierarchy of administrative list and codes provided in the chart of accounts. ii. Identify the economic items that would be executed during the fiscal year. iii. Identify the functions intended to be performed by government institutions (revenue and cost centres). iv. Identify the programmes intended to be carried out by the government institutions. v. Determine the sources of financing the budgeted amount for each budget line. vi. Identify the planned location for the economic transactions or government institutions.

Examiner’s report The question tests candidates’ knowledge on the preparation of budget estimates using Medium-Term Expenditure Framework (MTEF) as well as IPSAS 24 in part (a) of the question, while parts (b) and (c) test candidates’ knowledge on the explanation of functional, programme and geographical segments in relation to structure of National Chart of Account (NCOA) for budgeting purposes. All the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to explain the functional, programme and geographical segments in relation to structure National Chart of Account (NCOA) for budgeting purposes. Also candidates were unable to incorporate the additional information given in the notes to the question in the preparation of budget estimates using Medium-Term Expenditure Framework (MTEF). Candidates are advised to pay more attention to the relevant provisions of budget estimates using Medium-Term Expenditure Framework (MTEF) and also to make use of Pathfinder and Study Text for better performance in the Institute’s future examinations. 99

Marking guide Marks Marks a Preparation of proposed budget estimates Title ½ Calculation of total: Administrative sector budget estimates 3¾ Economic sector budget estimates 3¾ Law and justice sector budget estimates 3¾ Regional sector budget estimates 3¾ Summary of expenditure budget estimates by sectors 4½ 20

b. Explanation of National Chart of Accounts (NCOA) in relation to budget structure Explanation of the segments identified 6 c Steps required for budgeting with the National Chart of Accounts 4 Total 30

(a) The following measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti- corruption are as follows:

i. The existence of bodies that include within their competence the fight against corruption. The bodies must have the necessary independence and autonomy to perform their functions, subject to checks and balances to prevent abuse, and sufficient human and financial resources to effectively apply and enforce laws and regulations on anti-corruption. Where more than one body is involved in the fight against corruption, procedures should exist for information sharing and cooperation. Inter-agency communication is vital. Examples are the Economic and Financial Commission (EFCC) and Nigeria Financial Intelligence Unit(NFIU).

ii. The establishment of codes of conducts for public officials and subsequent dissemination and related training. These codes of conduct should be clear and transparent and be combined with strict sanctions against public officials involved in corruption. Public sector managers should likewise receive clear guidance and training on the manner in which allegations of corruption should be dealt with, including referral mechanisms to law enforcement authorities, procedures for the 100 protection of informants and the means of dealing with an official against whom allegations have been made. Codes of conduct might take the form of government-wide documents or involve a series of subject-specific codes. In either case, the content of these codes should take into account areas of public service which are particularly at risk of receiving or soliciting bribes or of resorting to extortion, including law enforcement, public procurement, export credit, development assistance, and customs and tax administration. Examples are the Code of Conduct Bureau(CCB) and the Public Service Rules.

iii. The reporting by domestic officials to superiors, prosecutors or other public authorities

• Where officials have been promised, offered or given a bribe, there should be smooth and unhindered reporting process.

• Officials should know, for example, how to report on such occurrences and how this will be dealt with.

• Where the bribe involves another official, sufficient safeguard should be put in place (such as whistleblowing and witness protection programmes) to ensure that reporting is not discouraged by the prospect of the reporting person being penalised in some way.

• Procedures must be put in place that will enable officials and public employees to provide anonymous information to those responsible for investigating corruption and integrity matters. Steps to treat communications as confidential need to take into account the rights of the accused person, and the possibility that disclosure of the information might be necessary to conduct an investigation and/or prosecution.

• Indicators of the success of these mechanisms and of codes of conduct and public sector training can include instances of such reporting by domestic officials.

iv. Reporting of promises, offers and bribes by competitors, employees or other private individuals, including the media, should also be facilitated.

• Procedures might include, for example, both formal mechanisms for reporting and anonymous hot lines.

• Procedures should guard against malicious false reporting by competitors such as by obtaining independent verification of allegations before taking further action.

v. The existence of adequate accounting procedures, independent auditing, and internal company controls are also essential for detecting and preventing corrupt practices. Companies should be prohibited from making off-the-books transactions or keeping off-the-books accounts, and they should be required to maintain adequate records of the sums and the means by which money is received and spent. 101 Likewise, auditors who discover indications of a possible illegal act of bribery should be required to report this to management and, as appropriate, to corporate monitoring bodies. Consideration should also be given to imposing a duty to report to law-enforcement authorities.

vi. Sharing of information received from public officials, companies or individuals with other concerned countries that contributes to the international framework of combating corruption. In complex or large-scale corruption cases, information sharing can be essential and hence should be facilitated either by direct mechanisms or by allowing sufficient flexibility within the existing system.

vii. Effective public awareness and assistance programmes are essential to the successful detection and reporting of corruption and practices lacking in integrity. These include activities (e.g. public campaigns) and information (e.g. easily accessible websites). Private sector awareness of laws and regulations on anti-corruption is essential and it may be desirable to establish, or assist professional bodies in carrying out training programmes for lawyers, accountants, auditors and others.

viii. As part of private sector awareness, individuals and companies might be permitted to submit a request for an opinion (based on the facts of a prospective transaction) as to whether the transaction would constitute an offence of bribing a public official. Such assistance should not create undue exceptions to corruption offences or otherwise undermine anti-corruption and integrity laws and regulations.

(b) Ways by which procurement officers can detect bid rigging Procurement officers can detect bid rigging through the following measures:

i. Check for warning signs and patterns when businesses are submitting bids Certain bidding patterns and practices seem at odds with a competitive market and suggest the possibility of bid rigging. Search for odd patterns in the ways that firms bid and the frequency with which they win or lose tender offers. Subcontracting and undisclosed joint venture practices can also raise suspicions;

ii. Look for warning signs in all documents submitted Telltale signs of a bid-rigging conspiracy can be found in the various documents that companies submit. Although companies that are part of the bid-rigging agreement will try to keep it secret: carelessness, or boastfulness or guilt on the part of the conspirators, may result in clues that ultimately lead to its discovery. Carefully compare all documents for evidence that 102 suggests that the bids were prepared by the same person or were prepared jointly;

iii. Observe warning signs and patterns related to pricing Bid prices can be used to help uncover collusion. Look for patterns that suggest that companies may be coordinating their efforts such as price increases that cannot be explained by cost increases. When losing bids are much higher than the winner’s bid, conspirators may be using a cover- bidding scheme. A common practice in cover schemes is for the provider of the cover price to add 10% or more to the lowest bid. Bid prices that are higher than the engineering cost estimates or higher than prior bids for similar tenders may also indicate collusion;

iv. Check for suspicious statements at all times When working with vendors, watch carefully for suspicious statements that suggest that companies may have reached an agreement or coordinated their prices or selling practices; and

v. Look for suspicious behaviour at all times Look for references to meetings or events at which suppliers may have an opportunity to discuss prices, or behaviour that suggests a company is taking certain actions that only benefit other firms.

(c) Powers of the Code of Conduct Bureau (CCB) The Code of Conduct Bureau was set up to:

i. Receive declarations by the public officers made under paragraph 12 of Part 1 of the Fifth Schedule of the 1999 Constitution; ii. Examine the declarations in accordance with the requirements of the Code of Conduct or any law; iii. Retain custody of such declarations and make them available for inspection by any citizen of Nigeria on such terms and conditions as the National Assembly may prescribe; iv. Ensure compliance with and, where appropriate, enforce the provisions of the Code of Conduct or any law relating thereto; v. Receive complaints about non-compliance with or breach of the provisions of the Code of Conduct or any law in relation thereto, investigate the complaint and, where appropriate, refer such matters to the Code of Conduct Tribunal; and vi. Carry out any other functions as may be conferred upon it by the National Assembly. 103

Examiner’s report Part (a) of the question requires candidates to discuss the measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption, while part (b) tests candidates’ knowledge of how procurement officers can detect bid-rigging, and part (c) of the question is on powers of the Code of Conduct Bureau. Few candidates attempted the question and performance was below average. The commonest pitfalls were the inability of the candidates to identify the measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption, while others could not explain the ways by which procurement officers can detect bid-rigging. Candidates are advised to have adequate knowledge of relevant provisions of Procurement Act 2007 and other laws or regulations for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption Identification of measures 5 Explanation of measures identified 5 10 b Ways by which procurement officers can detect bid rigging Identification of ways to detect bid rigging 2 Explanation of ways identified 3 5 c Powers of the Code of Conduct Bureau (CCB) 5 Total 20

(a) Powers of State Board of Internal Revenue Service The state Board of Inland Revenue Service has the power and responsible for:

i. Assessing, collecting and accounting for all taxes, fees, and levies in the state. The Commissioner of Finance is to prescribe the manner the Board is to account for the taxes, fees and levies collected; ii. Supervise the collection of all revenues due to the State Government with other ministries, extra-ministerial department, parastatals and government companies; 104

iii. Revise all obsolete rates collectable by the Board and initiate review and advice the Governor on it; iv. Liaise on tax and revenue matters with the Federal Government directly through the Joint Tax Board and make recommendations where appropriate to the Joint Tax Board on Tax policy, tax reform, tax registration, tax treaties and exemption as may be required from time to time; v. To administer the provisions of the Personal Income Tax Act 2004 as amended and relevant tax laws in the State; and vi. To generally control the management of the service on matters of policy subject to the provisions of the edicts and imposing discipline on employees of the State Internal Revenue Service.

(b) Functions of Department of Petroleum Resources (DPR)

i. DPR has the statutory responsibility of ensuring compliance to petroleum laws, regulations and guidelines in the oil and gas industry.

ii. Supervising all petroleum industry operations being carried out under licences and leases in the country.

iii. Monitoring the petroleum industry operations to ensure that they are in line with national goals and aspirations including those relating to flare down and domestic gas supply obligations.

iv. Ensuring that health safety and environmental regulations conform to national and international best oil field practices.

v. Maintaining records on petroleum industry operations, particularly on matters relating to petroleum reserves, production/exports, licences and leases.

vi. Advising government and relevant government agencies on technical matters and public policies that may have impact on the administration and petroleum activities.

vii. Processing industry applications for leases, licences and permits;

viii. Ensuring timely and accurate payments of rents, royalties and other revenues due to government.

ix. Maintaining and administering the National Data Repository (NDR).

x. Ensuring responsibility for the collection of royalty on crude oil and gas, rentals, penalty on gas flared, signature bonus and miscellaneous income into federation account. 105

(c) Powers of the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) The Commission shall have power to: i. Monitor the accruals to and the disbursements of revenue from the federation account;

ii. Review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities;

iii. Advise the federal, state and local governments on fiscal efficiency and methods by which their revenue is to be increased;

iv. Determine the remuneration appropriate to the holders of the offices as specified in Parts A and B of the First Schedule to this Act;

v. Make recommendations and submit its finding by a report thereto to the government of the federation or of the state, as the case may be, regarding the formula for the distribution of the federation accounts and the local government accounts;

vi. Discharge such other functions as may be conferred on the Commission by the Constitution of the Federal Republic of Nigeria, this Act, or any other Act of the National Assembly;

vii. Be a statutory member of each of the following government agencies:

• The Federation Account Allocation Committee;

• The Local Government Joint Account Allocation Committee;

• The Joint Tax Board;

• The Niger-Delta Development Commission; and

• The Commission on Ecological Fund;

viii. Have the power to demand and obtain regular and relevant information, data or returns from any Government agencies including the following:

• The Nigerian National Petroleum Corporation;

• The Nigerian Customs Service;

• The Federal Board of Inland Revenue;

• The Central Bank of Nigeria; and

• The Federal Ministry of Finance. 106

(d) Sources of revenue payable to the federation account

i. Direct taxes: These are payable by the individuals and firms such as company income tax, hydrocarbon tax, petroleum profit tax, capital gain tax, back duty assessment, and personal income tax of foreigners residing in Nigeria.

ii. Indirect taxes: These are taxes on goods and services in the form of custom and excise duties, forfeiture penalties, VAT, etc.

iii. Mining: These are oil pipeline licence fees, rents of mining rights, mining fees, royalties on minerals, NNPC earnings from direct sales, penalties for gas flared, and rent of oil wells.

Examiner’s report The question tests the candidates’ knowledge of the powers and responsibilities of State Board of Internal Revenue Service in part (a), while part (b) requires candidates to explain the specific functions of the Department of Petroleum Resources (DPR). Part (c) is on powers entrusted with the Revenue Mobilisation, Allocation and Fiscal Commission. Most of the candidates attempted the question and performance was average. The commonest pitfalls were the inability of the candidates to differentiate between the powers and responsibilities of State Board of Internal Revenue Service and Federal Inland Revenue Service (FIRS). Candidates are advised to make use of Pathfinder and Study Text of the Institute for better performance in future examinations.

Marking guide Marks Marks a Powers of State Board of Internal Revenue Service 4 b Functions of Department of Petroleum Resources (DPR) 4 c Powers of Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) 6 d Sources of revenue payable to the federation account Identification of revenue payable 1½ Explanation of the identified revenue payable 4½ 6 Total 20 107

a. Computation of relevant ratios for Koki Event Center S/N Details Formulae 2021 2020

i. Current ratio Current assets Current Liabilities 6,997.996 467,461 = 14.97 : 1 5,902,569 385,772 = 15.30 : 1 ii. Quick asset ratio Current assets- Inventories Current liabilities 6,997,996-239,615 467,461 = 14.46 : 1 5,902,569-296,017 385,772 = 14.53 : 1 iii. Working capital/Total assets ratio Current assets- Current liabilities Total assets 6,997,996-467,461 12,614,410 0.52: 1 5,902,569-385,772 11,475,064 0.48 : 1 iv. Total debts to Total assets ratio Total debts Total assets 9,169,773 12,614,410 = 0.73 : 1 7,791,076 11,475,064 = 0.68 : 1 v. Long-term debts/Total assets ratio Long-term debts Total assets 8,702,312 12,614,410 = 0.69 : 1 7,405,304 11,475,064 = 0.65 : 1 Interpretation of the accounting ratios

i. Current ratio In the two years, the company carried too much liquid capital than necessary. The best ratio here is 2:1. However, the result for 2021 is better than 2020. Therefore, the company is tying down too much fund that could have been invested in some other investments or start another event centre.

ii. Acid test ratio The company also carried too much cash, based on acid test ratio in both years which this means that there was idle cash in the business. This means that the company is tying down too much fund that could have been invested in some other investments or start another event centre.

iii. Working capital/Total assets ratio This ratio is appropriate for both years. However, the best could have been ratio 1:2. This capital structure ratio is of high benefit to the growth of the company.

iv. Total debts /Total assets ratio The result of this ratio is permissible, however, it is better to finance the company with more debts than cash because of tax benefits. For example interest payable on loan is tax-exempt. 108

v. Long-term debts/Total assets ratio The ratio is still permissible, however, it would be better if it is 2:1. Additionally, it is better to obtain more loans to finance the business because of the tax benefit of using loan to finance a business because of tax relief.

(b) Ways of conducting analytical review are as follows:

(i) Developing an independent expectation; (ii) Identify differences between expected and reported amount; (iii) Investigate the reasons for the differences; and (iv) Evaluate the differences and draw conclusion.

(c) Ways the performance appraisal of a profit-oriented entity differ from a local government public-oriented entity According to IPSAS 24 on presentation of budget information in financial statements, public sector entities, including local governments are required to present a comparison of the budgeted amount for which it is held publicly accountable and actual amount, either as a separate additional financial statement or as an additional budget columns in the financial statements, currently presented in accordance with IPSASs. The comparison of budgeted and actual amounts shall be presented separately as:

(i) The original and final budget amounts; (ii) The actual amounts on a comparable basis; and (iii) By way of the note disclosure, an explanation of material differences (variances) between the budget for which the entity is held publicly accountable and actual amounts, unless such explanation is included in other public documents issued in conjunction with the financial statements and a cross reference to those documents is made in the notes. A profit-oriented entity performance appraisal is in form of revenue growth, revenue per client, profit margin, client retention rate and customer satisfaction.

Examiner’s report Part (a) of the question tests candidates’ knowledge of computation of relevant ratios, while part (b) requires the candidates to state the ways by which analytical review can be conducted. Part (c) also requires the candidates to state the ways the performance appraisal of a profit-oriented entity would differ from that of a push oriented entity. Majority of the candidates attempted the question and performance was good. 109 The commonest pitfalls were the inability of the candidates to state the ways by which analytical review can be conducted and the ways the performance appraisal of a profit-oriented entity would differ from that of a public-oriented entity. Candidates are advised to cover all sections of the syllabus for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Computation of relevant ratios Identification of the formula 2½ Calculation of the ratios 7½ Interpretation 5 15 b Ways of conduction analytical review 3 c Ways the performance appraisal of a profit-oriented entity differ from public-oriented entity 2 Total 20

(a) Principles of debt rescheduling There are three main principles that guide the rescheduling process. These principles are discussed below:

(i) Imminent default This principle applies to the debtor country and requires the debtor nation to prove that it will not be able to meet its external debt service obligations unless granted relief. This proof can be shown through accumulation of debt service arrears. The IMF balance of payments projections of the country also serve the purpose, as these projections always provide an indication of the country’s economic position. This requirement is very important, as a debtor country will be denied access to the rescheduling process without the Club being satisfied that this condition has been fulfilled.

(ii) Burden sharing The principle of burden sharing applies to the creditor countries. It requires the Creditor to be prepared to share fairly and equitably the burden of the rescheduling in the proportion of their individual exposure to the debtor countries. In effect, the creditor must agree to provide the debtor country with relief that is commensurate with their exposure. The counterpart, from the point of view of debtors, is the principle of comparability of treatment, 110 which extols the need for debtors to treat creditors equitably in meeting the debt service obligations.

iii) Conditionality This principle, which is generally regarded as the “golden rule” of the Paris Club of Creditors also, applies to the debtor countries. It requires the debtor nation to put in place an IMF structural adjustment programmes before approaching the Club for rescheduling process. Sometimes such programmes determine the type of agreement, which the official creditors would be prepared to reach with the debtor country.

(b) Forms of debt conversion

(i) Debt for equity conversion. This is the exchange of a country's foreign denominated debt for local currency, which can be, used either for the establishment of new enterprise or for the purchase of equity share in an existing private sector concerns. (ii) Debt for debt conversion. This involves the exchange of foreign currency debt for domestic currency denominated debt e.g. Government Development Stock (GDS) that can be sold or traded in the domestic secondary market.

(iii) Debt for cash conversion. It entails the exchange of foreign currency denominated debt for local currency which can be used for local working capital, loan repayments and local tax payments.

(iv) Debt for export conversion. Under this arrangement, exports are paid for in a combination of cash that is, foreign currency and debts conversion proceeds.

(v) Debt for nature. This arises when the domestic currency proceeds of debt conversion are applied for development of conservation, promoting wildlife tourism and other natural resources. Another variant is a situation whereby the foreign currency denominated debt is exchanged for a particular natural resource for a given period.

(vi) Debt for development. In this case, the proceeds of debt conversion are employed for development activities of non-governmental private voluntary organisations such as foundations, trusts and multi-national aid organisations

(vii) Relending. Under this category, the proceeds of debt conversion are given out as fresh loan(s) to non-governmental private economic entity mostly multinational corporations. This practice is usually employed whenever the Central Bank does not have adequate foreign exchanges to pay the beneficiaries of debt conversion. 111

Examiner’s report The question tests candidates’ knowledge on the main principles of debt rescheduling and forms of debt conversion. Majority of the candidates attempted the question and performance was average The commonest pitfalls were the inability of the candidates to discuss the forms of debt conversion. Candidates are advised to make use of the Institute’s Pathfinder and Study Texts for better performance in future examinations.

Marking guide Marks Marks a Principles of debt rescheduling process Identification of main principles 2 Explanation of main principles identified 3 5 b Forms of debt conversions Identification of forms of debt conversions 2½ Explanation of forms of debt conversion identified 7½ 10 Total 15

(a) Effects of public expenditure The effects of public expenditure on the economy can be examined by reference to its impacts on a number of macroeconomic and socio-political activities as discussed below:

(i) Public expenditure and economic stabilisation The philosophy of laissez-faire does not always guarantee automatic achievement of economic objectives of full employment, general price stability, equitable distribution of income, socially desired growth rate as well as soundness of foreign accounts. In fact, the more advanced and free the market economy, the greater the tendency of fluctuations in macroeconomic variables such as income, employment and general price level. Public expenditure as an anti-cyclical tool can be designed in such a manner as to create effective demand thereby stimulating investment activities. Stimulation of investment will lead to increase in employment, output and reduction in price, other things being equal. It must be 112 emphasised however, that the total demand should be regulated so that the demand flows would match the supply flows, otherwise the stimulating effect would result into inflationary pressure.

(ii) Public expenditure and production Public expenditure can help the economy to attain a higher level of production. Through stimulation of investment activities, it can help to create conditions favourable for market forces to push up production. It can be used to create human skills through education and training and maintenance of social overheads. Expenditure on education and health promotes human capital development and also promotes physical stock of capital for growth. Expenditure on education, health, communication, increases people’s productivity at work and hence their incomes. With rise in income, savings also increase and this in turn has a beneficial effect on capital formation and investment. Through research and development, new and effective methods of production can be invented whereby local resources are used.

(iii) Public expenditure and economic growth The goals of planning are growth and social welfare, which can be realised only through government expenditure. Consequently, the government allocates funds to various sectors like agriculture, industry, transport, communications, education, energy, health, exports, and the likes with a view to achieve impressive growth. Government expenditure has been very helpful in maintaining balanced economic growth in the country. In furtherance of this, government takes keen interest in allocating more resources for development of backward regions. Such efforts reduce regional inequality and promote balanced economic growth. The government propels the growth in an industry by either increasing its spending in it or supporting it in the forms of subsidies, lower interest rate for investments etc. For example, the government through Central Bank had created various funds with differential interest rates to be disbursed to perceived users with the aim of correcting market failure thereby growing the economy.

(iv) Public expenditure and distribution An important aspect of the market mechanism is the inequalities of income and wealth, which arise on account of nature endowment and get widened through the institutions of private property and inheritance. Welfare consideration favours an equitable distribution of income and wealth since the purpose of economic policy is to attain the maximum level of social benefits possible. A shift towards equality may be achieved through various forms of public expenditure, especially those that are meant to help the poorer sector of the society. For 113 instance, items of common consumption may be subsidised and production of those, which are in short supply, can be taken up by public sector. Public expenditure on social security and subsidies to the poor are aimed at increasing their real income and purchasing power. Expenditure on education, communication and health has a positive impact on productivity of the weaker section of society, thereby increasing their income earning capacity.

(b) Principles of public expenditure on the economy

(i) Principle of economy: The resources of the economy are limited relative to need. Public expenditure is the financial counterpart of the limited resources, which the government uses directly, or places at the disposal of certain sections of the society for the purpose of achieving specific objectives. According to this principle, the use of public expenditure must not be more than what is just necessary. Utmost care must be taken to avoid waste of public funds.

(ii) Principle of sanction: According to this principle, no public funds must be used without proper authorisation and that funds must be applied only for the purpose for which they have been sanctioned. In a democratic setting, it is the responsibility of the legislature to sanction expenditure on demand by the executive authorities. The essence of such a measure is to prevent unscrupulous and unwanted use of public expenditure, and hence a check on misappropriation of public fund.

(iii) Principle of benefit: This is a most fundamental principle of public spending. According to this principle, money is to be spent to promote maximum social advantage (MSA) to the economy. Any public expenditure is to be viewed against the benefit that would accrue from it. Public expenditure is to be incurred, if only it will be beneficial to the society. The beneficial nature of public expenditure can manifest itself in terms of its effects on employment, consumption, savings, investment, output, price, income distribution, and so on.

(iv) Principle of surplus: This is completely opposed to the practice of deficit budgeting. According to this principle, government should be more prudent in the utilisation of resources and aim at meeting its current expenditure needs out of its current revenue. It should not overspend and run into debt. All efforts should be directed at achieving a moderate surplus. Such moderate surpluses recorded in the past should be used to meet some reasonable but unavoidable deficits during other periods.

(v) Principle of elasticity: The principle of elasticity requires that public expenditure should not in any way be rigidly fixed at all times. Rather, it should be fairly elastic. Public authorities should be in a position to adjust 114 the expenditure as the situation demands. During the period of depression, it should be possible for government to increase expenditure so that the economy is lifted from low level of employment. During boom period, the state should be in a position to curtail expenditure without causing any distress to the people.

Examiner’s report Part (a) of the question tests candidates’ knowledge of the effects of public expenditure on the economy, while part (b) requires the candidates to identify and explain the principles of public expenditure. Majority of the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to identify the effects of public expenditure on the economy and they were also unable to explain the principles of public expenditure. Candidates are advised to make use pay more attention to both the public sector accounting and public finance sections of the syllabus for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Effects of public expenditure Identification of principles of public expenditure 2 Explanation of principles of public expenditure identified 3 5 b Principles of public expenditure on the economy Identification of effects of public expenditure 5 Explanation of effects of public expenditure identified 5 10 Total 15

(a) Reasons for divergence between private and public appraisal of project There are many reasons for the divergence between the two systems of appraisal. These are: (i) The structure of income distribution in the society may cause a divergence between private and social appraisal. Since the market prices are essentially determined by income distribution, then it will not reflect the society's evaluation except the income distribution in the society is made equal; 115

(ii) The existence of externalities, which may be positive or negative, are not considered at all by the commercial or private enterprise analysis of project;

(iii) Neglect of consumers surplus in the commercial evaluation of project. This will result in under-estimation of the benefit from the society's view point; and

(iv) Price distortion through price control, wage control and interest rate regulations by government influence the price system.

(b) Difference between Cost-Benefit Analysis (CBA and Cost-Effectiveness Analysis

- (CEA)

i. The cost effectiveness analysis (CEA) approach identifies either the least cost method of realising an objective or the maximum output attainable at a given cost. In contrast to cost-benefit analysis (CBA), focus on cost and benefit. Cost effectiveness analysis does not attempt to supply information on the benefits of achieving goals. Rather, the emphasis is on the least or minimal cost of achieving the specific objective of a public sector project. ii. The CEA compares the relative cost and outcomes (effects) of a project, whereas CBA assigns a monetary value to the measure of the effect of a project. iii. CEA is a mixed (qualitative and quantitative) project evaluation technique, whereas the CBA is a quantitative project evaluation technique. iv. CEA generally does not consider opportunity costs, whereas opportunity cost should be taken into account in CBA.

(c) Procedure and limitations of cost effectiveness analysis Procedures of cost-effectiveness analysis are as follows: (i) Objective definition: This is meant to determine what actual target is. That is, what are the projects? (ii) Sourcing and assessment of alternatives: After the public project has been determined, what are the cost alternatives that are available? The information in this regard have to be collated; (ii) Selection of measure to be adopted: It has to be determined what types of approaches will enable management to achieve the set objectives within a reasonable period of time; (iv) Development of cost estimates: Cost estimates have to be collated, addressing the issues of what to include and how to measure them; and (v) Taking the final decision: Having ascertained the adequacy of cost effectiveness measures and relying on the information on cost estimates, the public sector organisation evolves the final decision, based on the principle of least cost. 116

(d) Limitations of cost-effectiveness analysis

(i) Procedures are subjective, since they are based on the personal judgment of the decision-maker. (ii) What is an appropriate measure of effectiveness cannot be easily resolved. (iii) It may lead to wrong decisions resulting from imperfect information on which costs are based and benefits derived.

Examiner’s report Part (a) of the question requires the candidates to highlight reasons for divergence between private and public appraisal of project, while part (b) asks the candidates to differentiate between Cost-Benefit Analysis (CBA) and Cost –Effectiveness Analysis (CEA). Part (c) asks the candidates to identify the procedures and limitations of Cost- Effectiveness Analysis. Few candidates attempted the question and their performance was poor. The commonest pitfalls were the inability of the candidates to differentiate between the Cost-Benefit Analysis (CBA) and Cost –Effectiveness Analysis (CEA). Also candidates could not identify the procedures and limitations of Cost-Effectiveness Analysis. Candidates are advise to make use of Pathfinder and Study Texts of the Institute for better performance in future examinations.

Marking guide Marks Marks a Reasons for divergence between private and public appraisal f project 4 b Difference between Cost-Benefit Analysis (CBA) and Cost - Effectiveness Analysis - (CEA) 5 c Procedures of Cost-Effectiveness Analysis 3 Limitations of Cost-Effectiveness Analysis 3 6 Total 15 117 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

a. i. Home-Use Limited Statement of profit or loss (extracts) for the years ended December 31, 2017, 2018,2019 and 2020 N’000 1/01/2017 Lease rental 8,000 31/12/2017 Depreciation expense 6,000 31/12/2017 Interest expense 2,000 1/01/2018 Lease rental 8,000 31/12/2018 Depreciation expense 6,000 31/12/2018 Interest expense 1,400 1/01/2019 Lease rental 8,000 31/12/2019 Depreciation expense 6,000 31/12/2019 Interest expense 740 96 1/01/2020 Lease rental 8,000 31/12/2020 Depreciation expense 6,000 31/12/2020 Interest expense 140 Home-Use Limited Statement of financial position (extracts) as at December 31, 2017, 2018, 2019 & 2020 N’000 2017 Non-current assets Carrying value of LPG Station (28,000-6,000) 22,000 Non-current liabilities Lease obligation (28,000 – 8,000) 20,000 2018 Non-current assets Carrying value of LPG Station (28,000-12,000) 16,000 Non-current liabilities Lease obligation (22,000 – 8,000) 14,000 2019 Non-current assets Carrying value of LPG Station (28,000-18,000) 10,000 Non-current liabilities Lease obligation (15,400 – 8,000) 7,400 2020 Non-current assets Carrying value of LPG Station (28,000-24,000) 4,000 Non-current liabilities Lease obligation (8,140 - 8,000 + 14) 154

Workings: Year Capital b/f Rental payment Capital outstanding Interest at 10% Capital c/f N’000 N’000 N’000 N’000 N’000 2017 28,000 (8,000) 20,000 2,000 22,000 2018 22,000 (8,000) 14,000 1,400 15,400 2019 15,400 (8,000) 7,400 740 8,140 2020 8,140 8,000 140 14 154

ii. Features of operating lease are:

• Ownership is not transferrable;

• Risks and rewards incidental to ownership resides with the lessor;

• Lease contains no bargain option;

• Lease term does not cover the major part of the asset’s economic life; 97

• Present value of minimum lease payment does not cover substantially the assets value;

• It is not specialised nature;

• The assets is easily replaceable;

• Lessee does not bear the lessor’s cancellation loss;

• No option to extend rental at lower than market value; and

• Gains or losses from the fluctuations in the fair value of the residual value does not accrue to the lessee Features of finance lease are:

• Ownership is transferrable to the lessee;

• Risks and rewards incidental to ownership resides with the lessee;

• It carries the option to purchase the asset at a lower value than the fair value;

• The lease term is for the major part of the economic life of the assets even if ownership is not transferred;

• At the inception of the lease, the present value of the minimum lease payments cover substantially at least the fair value of the leased assets;

• The leased assets are of specialised nature that only the lessee can use without major modifications;

• Other assets cannot easily replace the leased assets;

• If the lessee can cancel the lease, the losses associated with the cancellation are born by the lessee;

• The lessee has the ability to continue the lease for a secondary period at a rent substantially lower than the market rent; and

• Gains or losses from the fluctuations in the fair value of the residual accrue to the lessee. b.i. Examples of investment property are:

• Land held by a government hospital for capital appreciation, which may be sold at a beneficial time in future;

• Land held for a currently undetermined future use;

• A building owned by the reporting entity (or held by the reporting entity under a finance lease);

• A building that is vacant but is held to be leased out to less than one or more operating leases on a commercial basis to external parties; and

• Property that is being constructed or developed for future use as investment property.

ii. Disclosures that should be made when an investment property is stated at a revalued amount are:

• The effective date of their valuation;

• Whether an independent valuer was involved;

• The methods and significant assumptions applied in estimating the assets’ fair values;

• The extent to which the assets’ fair values were determined directly by reference to observable prices in an active market or recent market 98 transactions at arm’s length terms, or were estimated using other valuation techniques;

• The revaluation surplus, indicating the change for the period;

• The sum of all revaluation surpluses for individual items of investment property within that class; and

• The sum of all revaluation deficits for individual items of investment property within that class.

Examiner’s report Part (a i) of the question tests candidates’ knowledge on how lease will be treated in the financial statements (extract) of the lessee while part (a ii) requires the candidates to identify the features of operating lease and finance lease. Part (c) of the question also tests candidates’ knowledge on the examples and disclosure requirements of investment property (IPSAS 13). As a compulsory question, all the candidates attempted the question and their performance was average. The common pitfalls were the inability of the candidates to calculate the amount of the lease rentals that will be treated in the financial statements (extract) of the lessee and state the features of operating and finance leases. Also candidates were unable to state examples and disclosure requirements of investment property. Candidates are advised to have adequate knowledge of the relevant provisions of International Public Sector Accounting Standards (IPSAS) and to make use of Pathfinder and Study text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a..i. Statement of profit or loss (extracts) Title ½ Calculation of lease rental, depreciation expense and interest expense of 2017 1½ Calculation of lease rental, depreciation expense and interest expense of 2018 1½ Calculation of lease rental, depreciation expense and interest expense of 2019 1½ Calculation of lease rental, depreciation expense and interest expense of 2020 1½ Statement of financial position (extracts) as at 31 December Title ½ Calculation of carrying value of non-current assets for 2017, 2018, 2019 and 2020 1 99 Calculation of lease obligation under non-current liabilities for 2017, 2018, 2019 and 2020 1 Workings 5 14 ii Features of operating lease and finance lease Three features of operating lease 3 Five features of finance lease 5 8 b. Four examples of investment property 4 Four disclosure requirements when an investment property is stated at revalued amount 4 8 Total 30

SECTION B

(a) The IPSASB adopts a due process for the development of IPSASs that provides the opportunity for comment by interested parties including IFAC member bodies. Auditors, preparers (including finance ministries), standards setters and individual are priorities. The IPSASB’s due process for projects normally, but not necessarily takes the following stages:

i. Study of national accounting requirements and practice and exchange of views about the issues with national standard-setters; ii. Consideration of pronouncement issued by:

• The International Accounting Standard Board (IASB);

• National standard setters, regulatory authority and other authoritative bodies;

• Professional accounting bodies; and

• Other organisations interested in financial reporting in the public sector. iii. Formation of Steering Committees (SC). Projects Advisory Panels (PAPs) or sub-committees to provide input to the IPSASB on a project; iv. Publication of an exposure draft for public comment usually for at least four (4) months. This provides an opportunity to those affected by the IPSASB’s pronouncements for comments before they are finalised and approved by the IPSASB. The exposure draft will include a basis for conclusion; v. Consideration of all comments received within the comment period on discussion documents and exposure drafts, to make modifications to the proposed standards as considered appropriate in the light of the IPSASB’s; and vi. Publication of an IPSAS which includes a basis for conclusion that explains the steps in the IPSASB’s due process and how the IPSASB reached its conclusions. 100

(b) Some observations on government accounting system in developing countries by United Nations manual The general features of government accounting system as published by the United Nations are as follows:

i. Unlike the advanced countries, where research work has been documented and published, the records of general practice in the developing countries are difficult to obtain; ii. Relatively, little effort has been given to social government accounting and budgetary control system; iii. Accounting procedures in government departments, which reflect complicated systems of checks and balances, tend to impair the efficacy and timeliness of the accounting information and statistics produced; iv. Government accounting is seen mainly as an accountability device for public receipts and expenditure. Efficiency, effectiveness and economy of the operations tend to be neglected; v. Bookkeeping or administrative legal compliance procedures are more common than modern accounting approaches; vi. Accounting tends to be identified with expenditure control. The fact is that expenditure is subject to multiple checks; vii. The amount of paper work is much, but no efficiency, accountability or financial control is achieved; viii. The accounting data upon which government budgets and plans are based are frequently inaccurate and incomplete; and ix. Financial reports are delayed and generally in arrears. They consequently become obsolete at the point of implementation. Characteristics of a good system of public sector accounting as published by the United Nations (UN). The characteristics are as follows:

i. Comply with constitutional, statutory and other legal requirements of the relevant country; ii. It must be related to budget classifications. Budgetary and financial management must be closely integrated; iii. It must be maintained in a manner that will clearly identify the objects and purposes for which funds have been received and expended and the executive authorities who are responsible for custody and use of funds in programme/budget implementation; iv. Maintain records in a way that will facilitate audit by external review authorities and readily furnish the information needed for effective audit; v. Be developed in a manner that will permit administrative control of funds; vi. It must be developed so that it effectively discloses the economic and financial results of programme operations, including the sources of revenue, identification of costs and determination of the 101 operating results of government programmes and organisation; and vii. It must be maintained in a manner that will provide financial data useful for economic analysis and identification of governmental transactions and also assist in the development of the country’s accounts.

(c) Benefits of the ATRRS Accounting software are:

i. Familiarise the workforce with the use of IT equipment at an early stage of Government Integrated Financial Management Information System (GIFMIS) implementation, which would enable a smoother transition to the GIFMIS software; ii. Potentially reduce training period and requirement for GIFMIS; iii. Potentially reduce GIFMIS implementation cost; iv. Shorten business process re-engineering period (i.e. it is faster to transit from a semi-automated process than a manual process; v. Facilitates ease of reconciliation of the various bank accounts; and vi. Ensure that clean and accurate data will be available for migration to GIFMIS.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the five stages of IPSASB due process for development of standards. Part (b) tests the candidates’ knowledge of the United Nations’ observations and recommendation on features of good system of public sector accounting in the developing countries, as contained in the United Nations Manual on Government Accounting. Part (c) tests the candidates’ knowledge on the benefits of Automated Accounting Transactions Recording and Reporting System (ATRRS). Few of the candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to differentiate between developing countries and advanced countries. Most of the observations provided by the candidates are for advanced counties as against of developing countries. Also the candidates were unable to identify some benefits of the ATRRS accounting software Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the Institute’s future examinations. 102

Marking guide Marks Marks a. Five stages of IPSASB adoption of the due process 5 b. Five observations on government accounting system in developing countries 5 Characteristics of a good system of public sector accounting as contained in a United Nations manual on government accounting 5 10

c. Five benefits of the ATRRS accounting software 5 Total 20

(a) i. The MTEF contains the following information:

• A macro-economic framework setting out the three financial years, the underlying assumptions, and an evaluation and analysis of the macro- economic projection for the preceding three financial years;

• Fiscal strategy document setting out: - Federal government’s medium-term financial objectives; and - The policies of the federal government for the medium term relating to taxation, recurrent expenditure borrowings, lending and investment and other liabilities;

• The strategies, economic, social and developmental priorities of government for the next three financial years;

• An explanation of the finance objectives, strategic, economic, social and developmental priorities and fiscal measures;

• An expenditure and revenue framework, which will set out: - Estimates of aggregate revenue for the federation for each financial year, based on the pre-determined commodity reference price adopted and tax revenue projections; - Aggregate expenditure for each of the next three financial years; - Minimum capital expenditure projection for the federation for each of the next three financial years; and - Aggregate tax expenditure projection for the federation for each of the next three financial years;

• A consolidated debt statement indicating and describing the fiscal significance of the debt liability and measures to reduce the liability; and

• A statement on the nature and fiscal significance of contingent liabilities and quasi-fiscal activities and measures to offset the crystallisation of such liabilities.

ii. Requirements of the Fiscal Responsibility Act as it affect time lag for preparation of MTEF and notifying the National Assembly are:

• A copy of the underlying revenue and expenditure profile for the next two years; 103

• A report setting out actual and budgeted revenue and expenditure with a detailed analysis of the performance of the budget for the 18 months up to June of the preceding financial year;

• A fiscal target broken down into monthly collection targets;

• Measures of cost, cost control and evaluation of result of programmes financed with budgetary resources;

• A fiscal target document derived from the underlying medium–term expenditure framework, setting out the following relevant targets such as inflation rate, fiscal account balances and any other development deemed appropriate; and

• A fiscal risk document evaluating the fiscal and other related risks to the annual budget and specifying measures to be taken to offset the occurrence of such risks.

iii. Documents that should accompany the estimates of revenue and expenditure of the Nigeria’s annual budget are:

• A macro-economic framework;

• A fiscal strategy paper;

• An expenditure and revenue framework;

• A consolidated debt statement; and

• A statement on contingent liabilities.

b. i. Fiscal transparency This is the aspect of accountability, which requires government to carry out all aspects of budgeting responsibilities with openness, trust, basic values and ethical standards without hiding anything from the public. Where a government has something to hide, public reporting is more likely to be infrequent, unreliable and less comprehensive in order to hide material facts.

ii. IMF code of good practices and transparency

• Clarity of roles and responsibilities: The government sector should be separated from the rest of the public sector and from the rest of the economy. Also, policy and management roles within the public sector should be clearly stated and publicly disclosed;

• Open budget process: There should be clear procedures for budget execution, monitoring and reporting. The budget preparation should be guided by well-designed macroeconomic and fiscal policy objectives;

• Public availability of information: The public should be provided with comprehensive information on past, current and projected fiscal activity on major fiscal risks. The central government should publish information on the level and composition of its debts and financial assets, significant non-debt liabilities and natural resource assets. Fiscal information should be presented in a way that facilitates policy analysis and promotes accountability; and

• Assurances of integrity: These should include that: 104 ➢ Fiscal data should meet accepted data quality standards and budget forecasts and updates should reflect recent revenue and expenditure trends, underline macroeconomic development; ➢ Data in fiscal reports should be internally consistent and reconciled with relevant data from other sources. Major revisions to historical fiscal data and any changes to data classification should be explained; ➢ Ethical standards of behaviour for public servants should be clear and made public; ➢ Purchases and sales of public assets should be internally audited and audit procedures should be open to review; ➢ Fiscal information should be independently scrutinised. All public finances and policies should be subject to scrutiny by national audit body or an equivalent organisation that is independent of the executive; and ➢ The national audit body or equivalent organisation should submit all reports, including its annual report to the legislature and publish them.

Examiner’s report Part (a) of the question requires candidates to identify the key information to be contained in the Medium – Term Expenditure Framework (MTEF). Part (b) requires candidates to identify requirements of Fiscal Responsibility Act as it affects time lag for preparation of MTEF, notifying the National Assembly and to outline the documents that should accompany the estimates of revenue and expenditure of the annual budget. Part (c) of the question requires the candidates to discuss the term ’fiscal transparency’ and also to identify and explain codes of good practices and transparency in line with IMF code of good practices as related to the Nigerian government. Few candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to identify the key information to be contained in MTEF, requirements of Fiscal Responsibility Act as it affects time lag for preparation of MTEF, discuss the term ’fiscal transparency’ and explain codes of good practices and transparency in line with IMF code of good practices as related to the Nigerian government. Candidates are advised to read widely and ensure they have adequate knowledge of relevant provisions of MTEF and other international provisions on codes of good practices and transparency. Pathfinder and Study Text of the Institute are relevant learning materials on this aspect of the syllabus for better performance in future examinations. 105

Marking guide Marks Marks a. Identification of five key information to be contained in an MTEF 5 b. i. Identification of five requirements of Fiscal Responsibility Act as it affects time lag for preparation of MTEF and notifying the National Assembly 5 ii. Three documents that should accompany the estimates of revenue and expenditure of the annual budget 3 8 c. i. Explanation of ’fiscal transparency’ 4

ii. Identification any three codes of good practices 1½ Explanation any three codes identified 1½ 7 Total 20

a. i. Nun Local Council Development Area, Bayelsa State Revenue budget for the year ended December 31, 2021 Revenue Note N N Revenue generated from tax: 1 Adult men: 7,019,585,280 Adult women: 2,495,852,544 Total taxable income 9,515,437,824 Rent LCDA property: 2 Warehouses 16,000,000 Lock-up shops 36,000,000 Sheds 12,300,000 Total rent from LCDA property 64,300,000 Fees from market hawkers: 3 Regular hawkers 1,032,000,000 Other hawkers 134,640,000 Total fees from market hawkers 1,166,640,000 Tenement rate: Tenement rates collected on houses 2,411,000 Total revenue budget 10.748,788,824

ii. Nun Local Council Development Area, Bayelsa State Overhead cost budget for the year ended December 31, 2021

Note N Motor vehicle maintenance 5 675,000 Drainage cleaning 231,250 Transport and travelling 175,000 Office maintenance 160,000 Office accommodation 278,750 Utility services 250,000 Others 300,000 Total overhead cost budget 2,070,000 106

Workings 1 Population Current population with 6% growth (1.06 X 1,548,412) 1,641,317 Less: 1% Rural-urban migration (.01 X 1,641,317) 16,413 Total population of Nun LCDA 1,624,904 Revenue generated from tax N Adult men: (50% of 1,624,904 X .9 X 800 X 12) 7,019,585,280 Adult women: (20% of 1,624,904 X .8 X 800 X 12) 2,495,852,544 Total taxable income 9,515,437,824 2 Rent on local government property N Warehouses (2 x 8,000,000) 16,000,000 Lock-up shops (300 x 120,000) 36,000,000 Sheds (150 x 82,000) 12,300,000 Total rent from LCDA property 64,300,000 3 Fees from market hawkers: N Regular hawkers (17,200 x 200 x 25 X 12) 1,032,000,000 Other hawkers (18,700 x 200 x 3 X 12) 134,640,000 Totalfees from market hawkers 1,166,640,000 4 Tenement rates N Tenement charges collected on houses (2,411 x 1,000) 2,411,000 5 Overhead cost N Motor vehicle maintenance (540,000 X 1.25) 675,000 Drainage cleaning 185,000 X 1.25) 231,250 Transport and travelling (140,000 X 1.25) 175,000 Office maintenance (128,000 X 1.25) 160,000 Office accommodation (223,000 1.25) 278,750 Utility services (200,000 X 1.25) 250,000 Others (240,000 X 1.25) 300,000 Total overhead cost 2,070,000

b. The functions of the Ministry of Finance, Budget and Planning are as follows:

i. Developing reasoned economic assumptions and forecasts; ii. Issuing budget guidelines to the ministries and extra-ministerial departments; iii. Acting as the liaison between the presidency, ministries and extra- ministerial departments during the budget preparation; iv. Compiling total revenue and expenditure estimates;

v. Drafting the budget speech; vi. Supervising and controlling the implementation of the budget; vii. Monitoring and evaluating the performance of programmes funded through the government budget; viii. Assessing the impact of the budget on the economy; 107

ix. Developing formats of returns aimed at ensuring cost effectiveness in the use of government resources; and x. Carrying out research on budget utilisation and the attainment of national or state objectives.

Examiner’s report Part (a) of the question tests candidates’ knowledge of the preparation of revenue and overhead cost budgets. Part (b) tests the functions of the Ministry of Finance, Budget and Planning. Majority of the candidates attempted the question and performance was average The common pitfalls were the inability of the candidates to prepare revenue and overhead cost budgets and identify the functions of the Ministry of Finance, Budget and Planning. Candidates are advised that they should ensure they have adequate knowledge of the relevant provisions on the preparation of revenue and overhead cost budgets and other regulations relating to public sector account for better performance in the Institute’s future examinations. The Pathfinder and Study Text of the Institute are relevant learning materials on this aspect of the syllabus.

Marking guide Marks Marks a. Preparation of revenue budget Title 1¼ Calculation of components of total revenue budget 2¾ Calculation of total revenue budget ½ Workings 3½ Preparation of overhead budget Title 1 Calculation of components of total overhead budget 4 Workings 2 15 b. Functions of the Ministry of Finance, Budget and Planning Five functions 5 Total 20

a. Crowding-in effect: If public expenditure has positive or stimulating influence on private consumption, that is, personal consumption and investments, then we have crowding - in effects, which include:

i. Fiscal policy may crowd-in private investment, resulting in positive externalities in some cases. For example, if an increase in public investment is so effective in making people to believe that a boom may 108 come soon, many firms are likely to invest more. Consequently, other firms will increase their investments. This is a desirable outcome of the crowding-in effect, which comes from the positive effect on people’s attitude regarding future economic conditions;

ii. It is important for the efficacy of fiscal policy that public spending, especially public investment, produces a profitable outcome for private agents. If a public investment project makes private firms more productive, then crowding-in effect occurs; and

iii. In such situation, government may only stimulate a small number of private firms and/or industries. However, because of the crowding-in effect, this policy may produce more investment in the whole economy. Crowding-out effect: Public expenditure can have positive and negative effect or influence on private sector, if the public expenditure has negative or restrictive influence on private consumption especially on investments, we have crowding - out effect which include:

i. When governments borrow to pay for a stimulus, this drives up borrowing costs for households and firms, reducing the amount of consumption and investment;

ii. Crowding-out effect reduces the effectiveness of expansionary policies aimed at increasing the total demand for a nation's output;

iii. An increase in the interest rate depresses investment and hence income. This offsetting effect is called the crowding-out effect in the sense that an increase in public spending crowds out private investment; and

iv. A situation when increased interest rates lead to a reduction in private investment spending, it dampens the initial increase of total investment.

b. Ratios that can be used for measuring debt sustainability of a country and their shortcomings are:

i. External debt service to export ratio The debt-to-exports ratio is defined as the ratio of total outstanding debts at the end of the year to the economy’s exports of goods and services for any one-year. This ratio can be used as a measure of sustainability because an increasing debt-to-exports ratio over time, for a given interest rate, implies that total debt is growing faster than the economy’s basic source of external income, indicating that the country may have problems meeting its debt obligations in the future. 109 Shortcomings

• Countries that use external borrowing for productive investment with long gestation periods are more likely to exhibit high debt-to-exports ratios. But as the investments begin to produce goods that can be exported, the country’s debt-to-exports ratio may start to decline. So, for these countries, the debt-to-exports ratio may not be too high from an inter-temporal perspective, though in any given year it may be perceived as large.

• Some countries may benefit from highly concessional debt terms, while others may pay high interest rates. For such countries to better capture the implied debt burden in terms of the opportunity cost of capital, it is useful to report it and analyse the average interest rate on debt. We may also need to the present value of debt by discounting the projected stream of future amortisation payments including interest, with a risk-neutral commercial reference rate.

ii. Debt to GDP ratio The debt-to-GDP ratio is defined as the ratio of the total outstanding external debt at the end of the year to annual GDP. By using GDP as a denominator, the ratio may provide some indication of the potential to service external debt by switching resources from production of domestic goods to the production of exports. Indeed, a country might have a large debt-to- exports ratio but a low debt-to-GDP ratio, if exports comprise a very small proportion of GDP. Shortcomings

• While the debt-to-GDP ratio is immune to export-related criticisms that mainly focus on the differing degree of value added in exports and price volatility of exports, it may be less reliable in the presence of over-or under- valuations of the real exchange rate, which could significantly distort the GDP denominator.

• Also, as with the debt-to-exports ratio, it is important to take account of the country’s stage of development and the mix of concessional and non-concessional debt.

iii. Ratio of present value of debt to fiscal revenue This is defined as the ratio of future projected debt-service payments discounted by market-based interest rates (a risk- neutral commercial reference rate) to annual fiscal revenue. This ratio can be used as a measure of sustainability in those countries with a relatively open economy facing a heavy fiscal burden of external debt. In such circumstances, the government’s ability to mobilise domestic revenue is relevant and will not be measured by the debt-to-exports or debt-to-GDP 110 ratios. An increase in this indicator over time indicates that the country may have budgetary problems in servicing its debts Shortcomings

• Fiscal policy can be swayed by politics and placating voters, which can lead to poor decisions that are not informed by data or economic theory.

• If monetary policy is not coordinated with fiscal policy enacted by governments, it can undermine efforts as well

iv. Ratio of debt service to exports This ratio is defined as the ratio of external debt-service payments of principal and interest on long-term and short-term debt to exports of goods and services for any one-year. The debt-service-to-exports ratio is a possible indicator of debt sustainability because it indicates how much of a country’s export revenue will be used up in servicing its debt and thus, also, how vulnerable the payment of debt service obligations is to an unexpected fall in export proceeds. This ratio tends to highlight countries with significant short-term external debt. A sustainable level is determined by the debt-to-exports ratio and interest rates, as well as by the term structure of debt obligations. The latter may affect credit worthiness because the higher the share of short-term credit is in overall debt; the larger and more vulnerable is the annual flow of debt-service obligations. Shortcomings

• The amortisation payments on short-term debt are typically excluded from debt service and the coverage of private sector data can often be limited, either because the indicator is intentionally focused on the public sector or because data on private debt service are not available.

• A debt-service-to-export ratio not corrected for the import intensity of exports is biased downward for economies with a higher propensity to export.

v. Ratio of international reserves to short-term debt This ratio is a pure liquidity indicator that is defined as the ratio of the stock of international reserves available to the monetary authorities to the short-term debt stock on a remaining-maturity basis. This could be a particularly useful indicator of reserve adequacy, especially for countries with significant, but not fully certain, access to international capital markets. 111 The ratio indicates whether international reserves exceed scheduled amortisation of short-term, medium-term, and long- term external debt during the following year; that is, the extent to which the economy has the ability to meet all its scheduled amortisations to non-residents for the coming year, using its own international reserves. It provides a measure of how quickly a country would be forced to adjust if it were cut off from external borrowing, for example, because of adverse developments in international capital markets. Shortcomings

• A large stock of short-term debt relative to international reserves does not necessarily lead to a crisis as being portrayed by the ratio. Many advanced economies have higher ratios of short-term debt to reserves than many emerging economies, which have shown vulnerability to financial crisis.

• The ratio assumes that measured international reserves are indeed available and can be used to meet external obligations; this has not always been true historically.

Examiner’s report Part (a) of the question tests candidates’ knowledge on the difference between the crowding – in effect and crowding – out effect of fiscal policy while part (b) tests candidates’ knowledge on the ratios that can be used for measuring debt sustainability of a country and one shortcoming of each ratio. Few of the candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to differentiate between the crowding – in effect and crowding – out effect of fiscal policy. Also, the candidates were unable to explain the ratios that can be used for measuring debt sustainability of a country and one shortcoming of each ratio, Candidates are advised to make use of Pathfinder and Study Text of the Institute for better performance in the Institute’s future examinations. 112

Marking guide Marks Marks a. Discussion of crowding-in effect Definition 11/2 Explanation of any two of the effects 1 Discussion of crowding-out effect Definition 11/2 Explanation of any two of the effects 1 5

b. Ratios that can be used for measuring debt sustainability of a country and one shortcoming of each ratio Identification of any four ratios 2 Explanation of the four identified ratios 4 Identification of any one shortcoming of the identified ratios 4 10 Total 15 113

Otunba Local Government (a) Calculation of Net Present Value (NPV) for each project Project A Project B Project C Project D Project E Project F Year DF (12%) CF DCF CF DCF CF DCF CF DCF CF DCF CF DCF N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 0 1 -2,460 -2,460 -1,800 -1,800

- 1,750 -1,750 -1,800 -1,800 -1,800 -1,800 -1,500 -1,500 1 0.893 700 625.1 750 669.75 480 428.64 620 553.66 400 357.2 350 312.55 2 0.797 700 557.9 870 693.39 480 382.56 620 494.14 500 398.5 820 653.54 3 0.712 700 498.4 640 455.68 630 448.56 620 441.44 600 427.2 820 583.84 4 0.636 700 445.2 0 0 730 464.28 620 394.32 700 445.2 0 0 5 0.567 700 396.9 0 0 0 0 0 400 226.8 0 0 NPV 63.5 18.82 -25.96 83.56 54.9 49.93 Ranking 2 5 6 1 3 4 114

(b) Profitability Index (PI) Project A B C D E F N’000 N’000 N’000 N’000 N’000 N’000 Outlay 2,460 1,800 1,750 1,800 1,800 1,500 NPV 63.5 18.82 (25.96 83.56 54.90 49.93 PI = NPV Outlay 0.0258 0.0105 (0.0148) 0.0464 0.0305 0.0333 Ranking 4 5 6 1 3 2 Project to be invested based on Profitability Index Project Initial Investment NPV N’000 N’000 D 1,800 83.56 F 1,500 49.93 E 1,800 54.90 Sub-Total 5,100 188.39 B (Note) 1,100 11.50 Total 6,200 199.89 NB Project A, which is the 4th Project in ranking will not be selected because it is mutually exclusive with project E that is already selected. We will now select the next project in ranking, which is project B. Only N1,100,000 is left for investment in project B. Project B requires a total investment of N1,800.000. However, since the projects are said to be divisible, the available amount of N1,100,000 will be invested in project B and the NPV will be a proportion of total NPV for project B. Thus, 1,100,000/1,800,000 X 18.82 = N11,500,000.

(c) The rankings differ from (a) because NPV is an absolute measure whereas the profitability index is a relative measure that takes into account the different investment cost of each project. Also, the main difference between NPV and profitability index is that the PI is represented as a ratio, so it does not indicate the cash flow size.

Examiner’s report Part (a) of the question tests candidates’ knowledge of the calculation of net present value of projects and their ranking while part (b) asks the candidates to calculate the Profitability Index (PI) and rank the projects to determine how the fund available would be best invested. Pat (c) requires the candidates to state why the rankings in (b) differ from that in (a). Majority of the candidates attempted the question and their performance was above average. The commonest pitfalls were the inability of the candidates to calculate Profitability Index (PI) and rank the projects accordingly. Also, candidates could not state the reason why rankings under Net Present Value (NPV) and Profitability Index (PI) differ. 117 Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the future’s examinations.

Marking guide Marks Marks a. Calculation of net present value of projects A – F 61/2 Ranking 11/2 8 b. Calculation of profitability index for projects A – F 11/2 Ranking based profitability index 11/2 Decision on the projects to invest using profitability index 11/2 Decision on the mutual exclusive projects to invest on 1/2 Determination of how the balance of the total outlay should be invested 1 6

c. Explanation on the reason why ranking between NPV and PI approach to project appraisal differs. 1 Total 15

a) Current Position Particulars Pre-booked Standard Premium Family Sales Price per ticket ₦580 ₦780 ₦3,700 No of ticket 1,500 8,000 675 Monthly sales in quantity 30 x 1500 =45,000 240,000 20,250 Monthly Fixed Costs N130,000,000 Determination of Optimal price of Premium family: P = a + bx Where a = Maximum Price at which no Premium Ticket will be sold: b = Changes in P = Price Elasticity Changes in X Marginal cost = Variable Cost = N2050 x 0.92 = N1886 =b

- 100 25 -= 4 89 Therefore: bxap = + xaP =

- 4 700,3 =a- 6754 ( ) = a- 2700 a = 3700 + 2700 a= .400,6 Therefore P = 4400,6 - x Converting to Total Revenue TR=P x Q ( 4400,6 - xx ) = 400,6 xx - 24 MR = ∂ ∂TR x= 8400,6- x MC = VC = 1886 Pr isofitmax imized where MR =MC 886,18400,6 -x= - 400,6886,18 x = - - 514,48 x = - x=

- 8/514,4 - x= 564 units Contribution: Pre-booked Ticket Premium Price 580 780 6,400 Variable Cost (1,886) (1,886) (1,886) (1,306) (1,106) 4.514 Tickets sold per month 45,000 240,000 16,920 (58,770,000) (265,440,000) (76,376,880) Total Quantity for the month 1500 x 30=45,000; 8,000 x 30=240,000; 564 x 30=16,920 Total Contribution Prebooked Ticket (58,770,000) Standard Ticket (265,440,000) Premium Ticket 76,376,880 (247,833,120) Decision: No financial benefit unless it is undertaken for corporate social responsibility 90 Standard Ticket

b. Sensitivity Analysis Variable Cost Savings from Standard Ticket [(2,050 – 1,886) x 8,000 x 30] = 39,360,000 Hiring Cost of equipment = (5,000,000) 34,360,000

Examiner’s report The question tests candidates’ ability to provide solutions on optimal pricing, marginal cost and sensitivity implication on hire of ticketing equipment. The question was well attempted. The Performance was above average. The major pitfall observed was the candidates’ inability to decipher the method to be used to compute the marginal revenue as well as determine the sensitivity components of hire of the ticketing equipment. It is hereby advised that candidates should use ICAN study manual on Performance Management when preparing for future Institute’s examination.

Marking guide a Financial benefit and Premium Price Charged (22 ticks @½ mark) 11 b Sensitivity Analysis (4 ticks @1 mark) 4 15

a. There are four major ratios or indicators commonly used to determine the extent of indebtedness of any country. These ratios are explained briefly below:

i. External debt service to export ratio: This relates total external debt service to export of goods and services. It reflects the level of export earnings committed to servicing external debts. Since external debts are denominated in foreign currency, then servicing and repayment must be in foreign currency, which can only be procured through export earnings; ii. External debt stock to export ratio: The ratio relates to the availability of foreign exchange earnings in the economy. It is an important indicator since foreign exchange is needed to pay off foreign debts. It reflects the extent to which total exports of goods and services can be used to liquidate external debt outstanding. The movement in this ratio is an indicator of the nation’s debt service capacity; iii. External debt stock to nominal gross domestic product ratio: This ratio measures the extent to which total domestic output can be deployed to wipe out total outstanding external debt obligations. The higher this ratio the greater the degree of external debt burden; and iv. External debt service to nominal gross domestic product ratio. This ratio relates to the proportion of total domestic output set aside for servicing external debt. The ratio will be rising where total domestic output is falling. The higher these ratios the greater are the debt burden. However, it is important to emphasise that debt service ratios should be interpreted with 118 caution because the ratio will be relatively low if the country continues to default in debt service payment.

b. General reasons for borrowing The following are some of the reasons that have been advanced to justify the need for a country to borrow: i. Huge and persistent budget deficit: The government borrows when its expenditure is greater than its revenue (budget deficit), especially after its taxing capacity has been stressed to the limit; ii. Balance of payments disequilibrium: Excessive reliance on foreign resources to sustain domestic production processes, and on foreign goods and services beyond the nation’s foreign exchange earning capacity may lead government into contracting debt obligations; iii. Rapidly increasing population: In most developing countries, population is growing faster than the level of national output. The need arises for government borrowing to expand public enterprises and public utilities to cater for the welfare of the people; iv. Implementation of development programmes: To promote economic development usually require provision of new and upgrading of existing social and economic infrastructural facilities, like roads, railways, electricity, schools and hospitals. The tax revenue of government may be insufficient to execute such projects, hence the resort to government borrowing; v. Economic instability: A stable economy naturally provides an enabling environment for economic growth and development. Public debt of the internal type may be contracted to control inflation, while both internal and external borrowing may be used to stimulate economic activities during economic depression; vi. Natural disasters: Government has the responsibility to provide relief to the victims of earthquake, flood, fire disasters, famines, sectarian violence and other natural calamities. Government borrowing may be justified because such occurrences are never expected or budgeted for. vii. Fluctuations in government revenue: Most countries operate mono product economies, depending on only one (or very few) export product for foreign exchange earnings. A sudden poor performance of such product in the international market would reduce income considerably and adversely affect budget implementation. Any country that finds itself in such a situation may have no option than to borrow to bridge the financial resource gap; viii. War-time borrowing: Financial resources needed to prosecute wars are usually beyond the capacity of the government. Hence, the need to borrow arises to avoid devastating consequences of defeat; and ix. Debt servicing: New debt with favourable terms and conditions may be undertaken to service old debts thereby reducing the burden of debt on the economy. 119

Examiner’s report Part (a) of the question tests candidates’ knowledge of the ratios or indicators commonly used to determine the extent of indebtedness in a country while part (b) asks the candidates to identify and explain reasons for borrowing. Few candidates attempted the question and their performance was average. The common pitfalls were the inability of the candidates to identify and explain any three ratios or indicators commonly used to determine the extent of indebtedness in a country. Also, the candidates were unable to identify and explain the reasons for borrowing. Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Ratios commonly used to determine the extent of indebtedness of a country Identification of the three ratios 3 Explanation of any three ratios identified 3 6

b. Reasons for borrowing Identification of the six reasons for borrowing 3 Explanation of six reasons identified for borrowing 6 9 Total 15 ICAN/222/Q/B6 Examination No......................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2022 CORPORATE STRATEGIC MANAGEMENT & ETHICS EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have prohibited items such as telephone handset, electronic storage device, programmable devices, wristwatches or any form of written material on you in the examination hall. You will be stopped from continuing with the examination and liable to further disciplinary actions including cancellation of examination result if caught.

2. Write your EXAMINATION NUMBER in the space provided above.

3. Do NOT write anything on your question paper EXCEPT your examination number.

4. Do NOT write anything on your docket.

5. Read all instructions in each section of the question paper carefully before answering the questions.

6. Do NOT answer more than the number of questions required in each section, otherwise, you will be penalised.

7. All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or RED INK will not be marked. THURSDAY, NOVEMBER 17, 2022

Examiner’s report The question test’s candidates’ ability to provide solutions on investment appraisal decision with sensitivity components. The question was well attempted. The Performance was above average. The major pitfall observed was the candidates’ inability to decipher the sensitivity issues that bother on factors that affect the cash inflows for both Projects A and B. It is hereby advised that candidates should use ICAN study manual on Performance Management when preparing for future Institute’s examination.

Marking guide

a. Expected Net Present Value

• Joint Probability (9 ticks @1/6 marks) 1½

• Impact on cashflow (9 ticks @1/6 marks) 1½

• (7 ticks @1 mark) 7 10 b. The more profitable project (10 ticks @½ mark) 5 15 Working Notes

• The contract time for the 400 units is calculated using the learning curve technique. The company has already produced 200 units and now needs to produce another 400, i.e. 600 in total.

• The learning rate is computed as follows: Cumulative Cumulative Cumulative Average Quantity Hours Hours per unit 50 1,800 36 100 3,000 30 The learning rate is therefore 30/36 = 831/3%

• The contract time can now be determined using the learning curve formula: Y = axb 91 Where: Y = Cumulative average time for the cumulative output of 600 units A = the average time for the first batch i.e. 36 hours x = Output level desired Number of units in the 1st bacth = 600 50 = 12 b = Log of .83333 Log of 2 = −0.263 :. Y = 36(12)-0.263 = 18.73 hours Total hours for the 600 units= 600 x 18.73 = 11,238 hours Less: Total hours for the first 200 units already produced 5,000 hours Hours now required 6,238 hours

• Contribution per labour hour. This is necessary because labour is in short supply. Any labour hour used on the special order entails opportunity cost. From the budget statement. N’000 N’000 Sales 18,000 Materials 1,800 Labour 7,560 VOH 2,520 11,880 Contribution 6,120 Budgeted labour hours 42,000 Contribution/hour = 6,120,000 ÷ 42,000 = ₦145.71 Calculation of minimum price ₦ Materials 1,000kg x N1,800,000 = 120,000 15,000 Labour 6,238 x 7,560,000 = 1,122,840 42,000 VOH 6,238 x 2,520,000 = 374,280 42,000 Direct fixed costs = 180,000 Opportunity cost of labour 6,238 x ₦145.71 908,939 Minimum price N2,706,059 92

Examiner’s report This question tests candidates’ ability to use relevant costing approach to determine the minimum price to quote for special security padlock considering the learning effect on labour hours. The question was fairly attempted. However, the performance was average. The major pitfall observed was candidate inability to take note of the implication of learning effect on labour and variable overhead cost. It is hereby recommended that candidates should use ICAN study manual on Performance Management when preparing for future Institutes’ examination.

Marking guide The Minimum Price (15 ticks @1 mark) 15 93 ICAN/231/Q/B5 Examination No.................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA