Public Sector Accounting and Finance · 2023

a.i) Dovet State Government Statement of financial performance for the year ended December 31, 2022 Revenue: N’m N’m Federation account allocation 287,500 VAT allocation 87,500 Grants from Federal Government 33,750 Internally generated revenue 97,500 Grant from donor agency 25,000 Miscellaneous income 61,250 Interest on investment 10,000 Profit on sale of building (W 1) 3,750 Total revenue 606,250 Expenditure: Personal emolument 125,000 Maintenance of premises 5,000 Consolidated revenue charges 32,500 Overhead expenses 25,000 Interest on loans 12,500 Depreciation (W 2) - Buildings 6,250 - Motor vehicles 29,000 -Equipment and furniture 10,125 Miscellaneous expenses 37,500 Total expenditure 282,875 Surplus for the year 323,375 Consolidated Revenue Fund b/f 81,250 Consolidated Revenue Fund c/f 404,625

ii. Dovet State Government Statement of financial position as at December 31, 2022 N’m N’m Non-current assets (W 5) 455,875 Long term investments 187,500 Current assets Current assets (W 3) 60,000 Total assets 703,375 Liabilities: Non current liabilities Loan notes 250,000 Current liabilities: 100 Current liabilities (W 4) 48,750 Total liabilities (298,750) Net assets 404,625 Equity Consolidated Revenue fund 404,625 Total 404,625

Workings N’m 1 Profit on sale of building N 11,250 – (N 12,500 – N 5,000) 3,750 2 Depreciation: Building N(387,500- (250,000+12,500) @ 5%) 6,250 Motor vehicles (N145,000 @ 20%) 29,000 Equipment and furniture (N 67,500 @ 15%) 10,125 3 Current assets Current assets b/f 38,750 Add: - Proceeds from sale of building 11,250 - Interest receivable 10,000 Current assets c/f 60,000 4 Calculation of total current liabilities Current liabilities b/f 36,250 Loan interest 12,500 Current liabilities c/f 48,750 5 Non-current assets schedule Land and buildings Equipment and furniture Motor vehicles Total Cost: N’m N’m N’m N’m Bal. /bf 375,500 67,500 145,000 600,000 Disposal (12,500) - - (12,500) Bal. c/f 375,000 67,500 145,000 587,500 Depreciation: Bal. b/f 40,000 21,250 30,000 91,250 Disposal (5,000) - - (5,000) Charged for the year 6,250 10,125 29,000 45,375 Bal. c/f 41,250 31,375 59,000 131,625 Carrying amount 333,750 36,125 86,000 455,875 101

(b) Qualitative characteristics of financial reporting Qualitative characteristics of financial reporting are as follows:

i. Understandability Information is understandable when users might reasonably be expected to comprehend its meaning. For this purpose, users are assumed to have a reasonable knowledge of the entity’s activities and the environment in which it operates, and to be willing to study the information. Information about complex matters should not be excluded from the financial statements merely on the grounds that it may be too difficult for certain users to understand.

ii. Relevance Information is relevant to users if it can be used to assist in evaluating past, present or future events or in confirming, or correcting, past evaluations. In order to be relevant, information must also be timely.

iii. Materiality The relevance of information is affected by its nature and materiality. Information is material if its omission or misstatement could influence the decisions of users or assessments made on the basis of the financial statements. Materiality depends on the nature or size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

iv. Reliability Reliable information is free from material errors and bias, and can be depended on, by users, to represent faithfully that, which it purports to represent.

v. Faithful representation Financial reports represent economic phenomena (economic resources, claims against the reporting entity and effects of transactions and other events and conditions that change those resources and claims) by depicting them in words and numbers. To be useful, financial information must not represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. A perfect faithful representation would have three characteristics. It would be:

• Complete – the depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanation; 102

• Neutral –the depiction is without bias in the selection or presentation of financial information; and

• Free from error – where there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process.

vi. Prudence Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or revenue are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or revenue, or the deliberate overstatement of liabilities or expenses, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

vii. Comparability Information in financial statements is comparable when users are able to identify similarities and differences between that information and information in other reports. Comparability applies to the:

• Comparison of financial statements of different entities; and

• Comparison of the financial statements of the same entity over periods of time. An important implication of the characteristic of comparability is that users need to be informed of the policies employed in the preparation of financial statements, changes to those policies and the effects of those changes. It is important that financial statements show corresponding information for preceding periods, because users wish to compare the performance of an entity over time. Timeliness If There is an undue delay in the reporting of information it may lose its relevance. To provide information on a timely basis, it may often be necessary to report before all aspects of a transaction If there is an undue delay in the reporting of information it may lose its relevance. To provide information on a timely basis, it may often be necessary to report before all aspects of a transaction are known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the decision- making needs of users. 103

ix. Balance between benefit and cost The balance between benefit and cost is a pervasive constraint. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a matter of judgment. Furthermore, the costs do not always fall on those users who enjoy the benefits. Users other than those for whom the information was prepared may also enjoy benefits. For these reasons, it is difficult to apply a benefit-cost test in any particular case. Nevertheless, standard-setters, as well as those responsible for the preparation of financial statements and users of financial statements, should be aware of this constraint.

Examiner’s report Part ai. and ii. of the question test candidates’ knowledge on the preparation of financial performance and financial position of the state government, while part (b) requires the candidates to discuss characteristics of financial reporting in accordance with IPSAS 3 – Accounting Policies, Changes in Accounting Estimates and Errors. As a compulsory question, all the candidates attempted the question and their performance was above average. The common pitfalls were the inability of the candidates to calculate the depreciation to be charged to the statement of financial performance. Also, candidates were unable to properly discuss characteristics of financial reporting in accordance with IPSAS 3. 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 financial performance: Title ½ Calculation of total revenue 3 Determination of total expenditure 3¼ Stating of surplus for the year 1 Determination of Consolidated Revenue Fund c/f 1¼ Workings 1 10 ii Statement of financial position: Title ¼ Stating of total non-current assets 6 Determination of total assets 1½ Calculation of total liabilities 1½ Determination of net assets ½ 104 Recognition of net equity ½ Workings 1¾ 12 b. Qualitative characteristics of financial reporting Identification of four qualitative characteristics of financial reporting 2 Explanation of the qualitative characteristics identified 6 8 Total 30

a. The objectives of the Financial Memoranda:

i. To serve as administrative guidelines, which facilitate day-to-day running of local governments; ii. To expressly highlight the implications of disbursing government fund and property unjustly without proper authority and approval; iii. To facilitate recording of local government financial transactions in the appropriate accounting method; and iv. To serve as a learning tool for officers on first appointment or on transfer to a new section. The contents of Local Government Financial Memoranda:

i. The format of budget and budgetary control; ii. The financial responsibilities of the Chairman and other accounting officers of a local government; iii. The responsibilities of the Local Government Secretary, Treasurer and Heads of Departments; iv. The responsibilities of the Internal Auditor as they relate to audit alarm; v. The powers and functions of the Auditor-General for Local Government; vi. The various financial offences and their respective sanctions; vii. The means of revenue collection and control; viii. Main books of accounts kept in the Local Government; and

ix. The custody, accounting and control of stores. 105

b. Bureau of Establishment and Training of Waso State Preparation of journal entries S/N Particulars Dr Cr N’000 N’000 i. Inventory- Stationary account (1,250,000 @N1,200 each) 1,500,000 Payable- Unity Enterprises account 1,500,000 Being purchase of 1,250,000 reams of duplicating papers at N1,200 per ream on May 31, 2020

ii. Inventory- Training bags account (5,000 @ N2,500 each) 12,500 Bank account 12,500 Being purchase of 5,000 training bags at N2,500 per bag paid for on June 30, 2020

iii. User departments:

- Duplicating papers account (1,100,000 @ N1,200 each) 1,320,000

- Training bags account (4,500 @ N2,500 each) 11,250 Inventory - Duplicating papers account 1,320,000 - Training bags account 11,250 Being issuance of 1,100,000 reams of duplicating papers and 4,500 training bags to user departments during the year

iv. Non-personal advance account (25,000 @ N1,200 each) 30,000 Inventory – Duplicating papers account 30,000 Being 25,000 reams of duplicating papers damaged by flood water during the physical verification of inventory

v. Outstation account (25,000 @ N1,200 each) 30,000 Inventory – Duplicating papers account 30,000 Being transferred of 25,000 reams of duplicating papers transferred to its outstation.

Examiner’s report Part (a) of the question requires the candidates to identify objectives and contents of revised Local Government Financial Memoranda (1991) while part (b) tests the candidates’ knowledge of the preparation of journal entries to record financial transactions. Few of the candidates attempted the question and their performance was below average. 106 The common pitfalls were the inability of the candidates to identify objectives and contents of revised Local Government Financial Memoranda (1991). Also some candidates were unable to prepare journal entries and state the narration correctly. 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. Identification of three objectives of Local Government Financial Memoranda 3 Identification of five contents of Local Government Financial Memoranda 5 8 b. Preparation of journal entries Title 1 Correct journal entries of the transactions 6 Narration of the journal entries 5 12 Total 20

a. i. Functions of the Pension Transitional Arrangements Directorate (PTAD) The functions are as follows:

• Implementation of policies, rules and regulations relating to pension matters under the Defined Benefit Scheme (DBS);

• Ensure accurate payments are made to authentic pensioners under the civil service jurisdiction;

• Facilitate the maintenance of an accurate and comprehensive database of pensioners under its jurisdiction;

• Management and maintenance of pensioners’ records and files;

• Prepare budgetary estimates for existing pensioners as well as outstanding liabilities and benefits of pensioners with genuine complaints;

• Prepare and submit the monthly payroll of civil service pensioners and issue payment instructions to the Office of the Accountant-General of the Federation(OAGF), through the Government Integrated Financial Management Information System (GIFMIS) platform for direct payment to pensioners;

• Respond to pensioners’ complaints, relating but not limited to, non-/under- /over-payment of pensions, gratuities, death benefits, etc.;

• Carry out monthly payment analysis and payroll review and ascertain deficits in pension payments;

• Carry out prepayment audit of all payment vouchers;

• Carry out compliance audit to ensure government financial rules and regulations are complied with in all financial transactions; 107

• Review of financial statements– transcripts, bank reconciliations, pensioners’ statement of claims etc.;

• Safeguarding the assets of the department;

• Periodic examination of systems and processes, certification of payment vouchers and other accounting books and records by use of internal audit stamp;

• Production of monthly audit reports; and

• Collaborate with Pension Support team and ensure periodic verification of civil service pensioners.

(ii) Powers of the Commission over Pension Transitional Arrangements Directorate The Commission shall have power to:

• Regulate and supervise the activities of the Federal Government Pension Transitional Arrangements Directorate (PTAD) and the Federal Capital Territory Pension Transitional Arrangements Directorate to ensure compliance with the provisions of the Pension Reform Act;

• Intervene to administer and render technical support and advice on the management of the various Pension Transition Administration Directorates as per the directive of the President of the Federal Republic; and

• Ensure that the Federal Government Pension Transitional Arrangements Directorate and the Federal Capital Territory Pension Transitional Arrangements Directorate operate under the rules, regulations and directives issued by the Commission from time to time.

(b) i. Concepts

• Cash basisis the basis of accounting under which revenue is recorded only when cash is received and expenditure recognised only when cash is paid, irrespective of the fact that the transactions might have occurred in the previous accounting period. This is a simple method of recording financial transactions in the public sector. The cash basis measures cash flows at the time those flows actually take place.

• Accrual basis - The basis records expenditures and revenues when they become due (that is in many cases before the associated cash flows take place). It records assets and liabilities and is therefore associated with the production of statements of financial position. It is also associated with providing depreciation on assets with finite lives. 108

• Modified accrual is similar to the full accruals basis, but it is simpler because it does not involve the capitalisation of non-current assets or the provision of depreciation of non-current assets.

• Modified cash basis-Under this basis, the books of accounts are left open for a maximum of three months after the end of the year, so as to capture substantial amount of income or expenses relating to the year just ended. It allows a short period of time after the year-end for settling liabilities of the year just ended (and treats this expenditure as occurring in the year just ended).

• Commitment basis- It is a basis that records anticipated expenditure evidenced by a contract or a purchase order. In public sector financing, budgetary and accounting systems are closely related to the commitment basis.

ii. Merits of cash basis of government accounting

• It is simple to understand;

• It eliminates the existence of receivables and payables;

• It permits easy identification of those who authorised payments and collect revenue;

• It allows for comparison between the amount provided in the budget and that actually spent;

• It saves time and is easy to operate;

• It permits the delegation of work in certain circumstances; and

• The cost of tangible assets is written off in the year of purchase, resulting in fewer accounting entries.

iii. Merits of accrual basis of government accounting

• It takes a realistic view of financial transactions;

• It reveals an accurate picture of the state of financial affairs at the end of the period;

• It could be used for both economic and investment decision- making as all parameters for performance appraisal are available;

• It aligns with the ’matching concept; and

• It makes allowances for the diminution in the value of assets used to generate the revenue of the enterprise. 109

Examiner’s report Part (ai.) of the question requires candidates to identify the functions Pension Transitional Arrangements Directorate (PTAD) as contained in Pension Reform Act (PRA) 2014 while part (aii) requires the candidates to identify the powers, which National Pension Commission has over the Pension Transitional Arrangements Directorate of the Federation and Federal Capital Territory. Part (b) of the question requires the candidates to explain the concepts and bases of public sector accounting including the merits of cash basis and accrual basis. Few candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to identify the functions Pension Transitional Arrangements Directorate (PTAD) and the powers, which National Pension Commission has over the Pension Transitional Arrangements Directorate of the Federation and Federal Capital Territory. Candidates are advised to read widely and ensure they have adequate knowledge of relevant provisions of Pension Reform Act (PRA) 2014 and other extant regulations. Pathfinder and Study Text of the Institute are relevant learning materials on this aspect of the syllabus for better performance in future examinations

Marking guide Marks Marks a. i. Identification of seven functions of the Pension Transitional Arrangements Directorate 7 ii. Identification of three powers of the Pension Transitional Arrangements Directorate 5 12

b. i. Explanation of four bases of accounting 4 ii. Identification of three merits of cash basis 3 iii. Identification of three merits of accrual basis 3 10 Total 20 110

a. i. Requirements of the Fiscal Responsibility Act as it affect time lag for preparation of Medium-Term Expenditure Framework (MTEF) and notifying the National Assembly. Section 11 of the Fiscal Responsibility Act, 2007:

• Requires preparation and submission to the National Assembly, a medium-term expenditure framework for the next three financial years on which the National Assembly will deliberate. This would have to be done not later than six months from the commencement of the Act; and

• Subsequently, not later than four months before the next financial year, commences a medium-term expenditure framework for the next three financial years will be prepared for the National Assembly’s consideration.

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

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

• An expenditure and revenue frameworks which 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. 111

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

• A statement on the nature and fiscal significance of contingent liabilities and quasi-fiscal activities and measures to offset the crystallisation of such liabilities. The estimates and expenditure stated above should be: ➢ Based on reliable and consistent data; ➢ Targeted at achieving the macro-economic projection; and ➢ Consistent with and derive from the underlying assumptions contained in the fiscal strategy document.

b. i. Objectives of public sector accounting The main objectives of public sector accounting are as follows:

• Determining the legitimacy of transactions and their compliance with the statutes and accepted norms. Public sector disbursements should accord with the provisions of the Appropriation Act and Financial Regulations. There should be due authorisation for all payments so as to avoid misappropriation;

• Providing evidence of stewardship. The act of rendering stewardship is being able to account transparently and diligently for resources entrusted. Government and public sector officers are obliged to display due diligence and sense of probity in the collection and disposal of public funds;

• Assisting planning and control. The future is full of risks and uncertainties. Therefore, mapping out strategic plans prevents an organisation from drowning in the tides. Plans of actions provide the focus of activities, which are being pursued. The unforeseen circumstance is built into plans so as to prevent or at least reduce corporate failure. Public sector establishments should act in accordance with the ’mandate theory’ of governance. Control measures are adjuncts to skillful planning. They assist in avoiding unnecessary deviations from the pursuit of the original objectives set;

• Ensuring objective and timely reporting Users of public sector accounting information are anxious to bridge their knowledge gaps on government activities. Therefore, they value prompt and accurate statistics to evaluate government performance; 112

• Examining the costs incurred and the benefits derivable In public sector organisations, it is difficult to measure costs and benefits in financial terms. The analysis of cost-benefit assesses the economic and social advantages (benefits) and disadvantages or inconveniences (costs) of alternative courses of actions, to ensure that the welfare of the citizens are well provided for;

• The various sources of finance Identifying and highlighting various sources of revenue receivable to execute both recurrent expenditure and capital projects is part of the responsibilities of the management. This objective is very important and statutory for governments of all tiers in order to meet their respective statutory responsibilities to the citizens in form of dividends of democracy; and

• Proffering solutions to challenges affecting quality decision- making process By all extant laws and policies, public sector is charged with the underlined responsibilities to put in place all mechanism to identify any form of challenges that may hinder smooth administration of the sector by proffering solutions to any form of problems. Based on the above skill process, decision-making process can be enhanced and made more efficient.

ii. External users and their information needs:

• National Assembly: Used for budget process and for carrying out their oversight functions;

• Members of the public: To have knowledge of budget and expenditure in order to evaluate the performance of the government;

• Foreign countries: To have idea of the finances of government towards foreign direct investments;

• Foreign financial institutions such as International Monetary Fund (IMF), World Bank, Department for International Development (DFID), United Nations Children’s Fund (UNICEF), etc.): To determine the extent of indebtedness of the country with a view to granting it loans, aids and loan forgiveness;

• Creditors: To ascertain the extent of loan capability of the country; and

• Researchers: Academic researchers who intend to investigate certain areas of public sector may need to make use of public sector financial reports to advice the governments for future planning and better governance. 113

Examiner’s report Part (ai) of the question requires the candidates to explain requirements of Fiscal Responsibility Act as it affects time lag for the preparation ofhe Medium–Term Expenditure Framework (MTEF) and submission to the National Assembly while, part (aii) of the question requires the candidates to identify the documents that should accompany the estimates of revenue and expenditure of the Nigeria’s annual budget to the National Assembly. Part (b) requires the candidates to identify the external users of public sector accounting reports and highlighting their information needs. Few of the candidates attempted the question and performance was average. The common pitfalls were the inability of the candidates to explain the two requirements of the Fiscal Responsibility Act and the documents that should accompany the estimates if revenue and expenditure of the Nigeria’s annual budget to the National Assembly (NASS). Candidates are advised to read widely and ensure they have adequate knowledge of relevant provisions of MTEF 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. i. Explanation of two requirements of the Fiscal Responsibility Act as it affects time lag for preparation of MTEF and notifying the National Assembly 3 ii. Identification of any five documents that should accompany the estimates of revenue and expenditure of the Nigeria’s annual budget 5 8 b.i. Identification of any four objectives of public sector accounting 2 Explanation of objectives identified 4 6

ii. Identification of external users of public sector accounting information 3 Highlighting one information need of each of the external users identified 3 6 Total 20 114

i. Reasons why government intervene in the economy

• Political and social ideologies (market failure argument) The operation of market mechanism presupposes that the economic activities are guided by rational expectations, that is, profitability. The need for government can be explained by the existence of political and social ideologies, which is different from the principle of consumer’s behaviour guided by utility satisfaction. More importantly, market forces left alone cannot perform all economic functions. Therefore, there is need to guide, regulate and supplement market forces under certain circumstances.

• Allocation of resources The claim that market mechanism leads to efficient allocation of resources is based on the conditions of perfect competition, which presupposes the existence of free entry and exit, perfect knowledge of the market, mobility of factors and lack of preferential treatment among other factors. Government regulations and other measures are required to ensure the presence of these conditions, as market on its own will not guarantee their existence.

• Healthy competition It is the role of government to ensure that competition exists in the production of goods and services. It is therefore expected to improve quality and increase quantity of output. However, in the absence of regulation, competition may become inefficient or at best reduced to decreasing cost.

• Legal structure An important factor for effective and efficient market system is the legal structure that guarantees punishment for violators of rules and regulations. It is the responsibility of government to ensure strict adherence to rules and regulations otherwise abuse becomes an albatross to economic growth and development.

• Externalities (natural resources) The case of externalities may be a potent factor to explain the rationale for government intervention. Even if the legal structure is provided and all barriers removed, certain goods and services cannot be provided through the market system due to the presence of externalities that cause distortion between private and public appraisal of projects. Externalities can only be tackled through public policy. The commercial interest of private investors may be in conflict with those of the state. A private investor, for example, authorised to mine a particular resource may likely want to make more money by extracting more than it is expected. 115

• Economic objectives The economic objectives of full employment, general price stability, optimum growth rate, equitable distribution of income as well as soundness of foreign account cannot be brought about automatically, even in the most highly developed financial economy. Therefore government policies and other measures are to achieve these objectives.

• Strategic or security Governments, set up public enterprises because of the very nature of the projects, for example currency and mint cannot be expected to be left in the hands of private investors. Similarly, some defence industries, certain research and development organisations would be better handled by the public enterprises.

• Monopoly Another reason for the establishment of public undertakings is where the effective control of the economy is sought to be in the hands of the state rather than individuals. This is the argument of not permitting the emergence of monopoly in the hands of private investors. The authorities might plan to have a strategic control over the workings of the whole economy through controlling of key sectors. This is generally referred to as controlling the commanding heights of the economy from which, the movement of the economy can be guided.

iii. Macroeconomic objectives in Nigeria

• Full employment Full employment occurs when resources especially human capital are fully engaged in productive activities that will contribute to increase in the volume of output. It describes a situation where able-bodied people who are willing to work at the prevailing wage rate are able to find job. It does not imply 100 per cent employment but rather something around 95 per cent.

• General price stability This implies moderate fluctuations (upward and downward movement) in the general price level of goods and services over a given period. A rise in the price level of goods and services that is less than 3 percent is considered good as such will stimulate investment for growth and development. Higher rise in price level say over 7 percent means a fall in the purchasing power of a unit of currency and hence unacceptable.

• Equitable distribution of income A fair or equitable distribution of income means that the gap between the poor and the rich is not too wide but sufficient enough to create incentive for hard work. There should be no concentration of wealth in the hands of few individuals but rather fair spread among the people. 116

• Increased economic growth rate This means a steady and non-inflationary increase in the volume of output of goods and services of the nation. It is the primary objective of the government to pursue policies that will enhance steady rise in national output that will not be inflationary.

• Soundness of foreign account or balance of payment equilibrium The country’s trade position with the rest of the world should be such that will not permit or allow persistence deficit or surplus. Any deficit or surplus should be promptly addressed to avoid being regarded as unfair dealings with other countries.

Examiner’s report Part (ai) of the question requires the candidates to explain reasons why government intervenes in the economy, while part (aii) requires the candidates to explain the macroeconomic objectives in Nigeria. Most of the candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to explain reasons why government intervenes in the economy. Also, the candidates were unable to identify macroeconomic objectives of the government. Candidates are advised to make use of Pathfinder and Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks i. Identification of any five reasons why government intervene in the economy 2½ Explanation of reasons identified 5 7½

ii. Identification of any five macroeconomic objectives in Nigeria 2½ Explanation of macroeconomic objectives identified 5 7½ Total 15 117

a. Criteria for decision making while choosing from different sources of international loans.

i. The comparative rates of interest In using comparative interest rates to decide between loan offers, the nominal rate of interest is rarely used. Instead comparison of loans from different countries or market sources is based on the real rate of interest, which takes into consideration the rate of inflation in the creditor countries. Furthermore, the way the interest on the loan is charged as well as the manner of its calculation is important, as these would determine the amount to be charged. Some creditor sources might charge interest at a fixed rate, that is, a flat rate percentage of the full loan or at a variable rate, which fluctuates over the life of the loan and in accordance with financial market conditions.

ii. The possibility of the loan being project-tied Where loans are applied for the execution of specific projects, a further consideration of interest rate charges may focus on the returns or benefits from the project to be financed by the loans. In such instances, the project is subjected to appropriate comparative minimum unit-cost tests using national or international yardsticks. If the project is supposed to be profit yielding, it must be ensured that there is a positive internal rate of return, which is at least equal to the cost of borrowing, while projects in the area of social services, or infrastructures are considered on the basis of their cost-benefit ratios.

iii. Degree of concessionality Another criterion for loan selection where several sources of external loans are being considered is the degree of concessionality of such a loan, that is, the extent of “softness” or otherwise of the loan. The degree of concessionality is measured by the percentage of grant element present in the loan. Loans have various degrees of concessionality depending on their source and nature. Where a loan has a grant element of 100 percent, it is regarded as being totally concessional.

iv. Repayment ability One of the underlying principles on which loan terms and conditions are considered before selection is the repayment ability of the borrowing country. This is of mutual benefit to the donor as well as the recipient of the loan. Before taking a loan it must be ensured that the projects and programmes for which the loan is being sourced will eventually provide sufficient income from which the debt can be serviced as and when due. A further consideration of the repayment 118 ability is the socio-political condition of the country. Where the government in power does not command popular credibility, it may be difficult for such to access foreign loans.

b. Principles of debt rescheduling process There are three main principles that guide the Paris Club rescheduling process. These principles are discussed briefly 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 it is granted a 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 creditors 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, 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.

c. Problems facing state government in financing projects through capital market The problems include:

i. Poor situation of accounting on the part of a state government; ii. Lack of qualified personnel to effectively evaluate, appraise and monitor projects; iii. Poor performance of existing state government projects which act as disincentive to potential investors; 119

iv. Inability of government to package and market viable projects to the investing public; v. Lack of awareness of the potential of the investing public; vi. Preference for short-term investments by the public; and vii. Increased debt accumulation by state governments can reduce the capacity for further borrowing from the capital market.

Examiner’s report Part (a) of the question requires candidates to explain the criteria for decision making when contracting loan obligations from different sources of credits, while part (b) asks the candidates to explain main principles that guide the Paris Club debt-rescheduling process. Part (c) requires the candidates to discuss problems facing state governments in financing projects from capital markets. Most of the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to explain the criteria for decision-making and main principles that guide the Paris Club debt-rescheduling process. Also, candidates could not correctly discuss problems facing state governments in financing projects from capital markets. Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the future examinations.

Marking guide Marks Marks a Identification of any four criteria for decision making 2 Explanation of four criteria identified 4 6 b. Identification of any two principles that guide the Paris Club rescheduling process 1 Explanation of the principles identified 3 4 c. Discussing five problems facing state government in financing projects through capital market 5 Total 15

a i. Public revenue refers to income generated by government from its activities or operations. In other words it is a segment of total funds needed to finance government activities. It may be difficult to provide a complete list of all the sources of public receipts. However, the common and important ones include taxes, fees, fines, borrowings, disposal of assets, income from public undertakings, gifts, donations, licenses, royalties, rents, rates, levies, printing of currency, and so on. 120 Public receipts cover receipts from all sources; public revenue is a narrower concept and does not include borrowings, printing of currency, grants, gifts and donations, sale of public assets and reimbursement.

ii. There are two broad sources of revenue to the federal government of Nigeria as usually specified in the country’s annual budget. These are the oil revenue and non-oil revenue. The oil revenue sources include proceeds of crude oil sales, NNPCL earnings, royalties, signature fees and so on. The non-oil revenue comprises personal income tax, company income tax, excise duty, import and export taxes, value added tax, stamp duties, etc. There are also the independent revenue sources like fees, fines, levies, investment income, licences, rent, rates, etc. The oil revenue has remained the principal source of government funding as it generates most of the foreign exchange earnings for the country. Though there are other non-oil activities contributing to gross domestic product, their contributions in terms of revenue generation have been minimal due to low revenue diversification.

b. The problems of revenue allocation in Nigeria

i. Over-dependence on oil revenue The discovery and subsequent exploration of oil in Nigeria and its high yielding revenue has continued to undermine the development of the hitherto buoyant agriculture and other viable sectors such as industry, mining and human capital development. Consequently, oil revenue has become the major source on which the country critically depends. This has with time led to the evolving of “a leech syndrome” among the component units of the federation thereby making the states dependent on the handouts from the Federation Account. The leech nature of most of the states makes them an economic appendage of the central government and has eroded the autonomy of the federating units. This, in a way, established a master-servant relationship between the federal government and the component units. The current revenue sharing formula encourages laziness and idleness as states rely heavily on the federal allocation- a situation that makes most states, perhaps, excluding Lagos, parasitic in nature feeding voraciously on the Federation Account.

ii. Conflicts over revenue sharing formula Revenue sharing among the component units of the Nigerian federation has been, from inception, replete with agitations, controversies and outright rejections due to elevation of political rather than economic considerations in making decisions. The process of revenue sharing is inundated with conflicting criteria that were, often times, rejected by majority of the states. Consequently, several attempts at revenue sharing (both vertically and horizontally) have been made, yet no 121 revenue sharing formula and principles have been considered acceptable among and within the tiers of government at any point in time. Due to the foregoing, the determining factor in revenue allocation strongly revolved around political rather than economic criteria, thereby making revenue allocation issue in Nigeria contentious and thorny.

iii. Agitation for resource control The historical facts of the use of the principle of derivation havebeen a source of inter-regional or states conflict, rivalry and antagonism. The major fall out of the down play of the principle of derivation, which stipulates that the component units of a system should be able to control some of their own resources as they desire, is the agitation for resource control that has taken criminal dimensions in most of the oil producing communities and states of the Niger Delta. There have been multifarious cases of kidnapping, vandalism of oil pipelines and installations, desperations and high scale violence.

iv. Increasing fiscal units The rapid changes in the number of fiscal units that is not guided by economic and political philosophy led to creation of states that are fiscally and financially unviable and consequently increased demand for increased share of the "national cake". Many states in Nigeria will blame their inactivity and ineffectiveness on low or lack of allocation from the federation account rather than become inventive and innovative in ideas that will cause increase in their mobilisation of resources. The increase in the number of fiscal units in Nigeria from 3 to 4, 12, 19, 21, 30 and 36 within a period of three and a half decades is contrary to what obtains in older and other federations thereby contributing to the unending resource control controversy.

v. Unstable constitutional framework The absence of a permanent and generally acceptable legal structure in the form constitution may result in chaotic tendencies. For instance, the last constitutional conference in the United States of America was in 1787 and only 27 amendments have been made as at 1999 as opposed to Nigeria in which several constitutional conferences had taken place since independence without general acceptability. In addition, states in Nigeria do not really have the statutory power to raise taxes and collect the proceeds and as such the problem had centered not on who should raise but how the proceeds should be shared. Therefore, expenditure and tax or revenue assignment is inundated with ambiguity and inefficiency. A good example is the case of issuance of road worthiness certificate by Lagos State Ministry of Transport, which became a legal tussle between the government and some activists.

viii. Lack of political will The absence of sincere desire on the part of public office holders to address the challenges of revenue sharing is aptly reflected in the refusal to convoke a conference of leaders of various groups and ethnic nationalities that may lead to design of acceptable resource allocation scheme. Even where such conferences have been convoked in the past, the will to implement suddenly disappears from the initiators.

Examiner’s report Part (ai) of the question asks the candidates to differentiate between public revenue and receipts and to state their sources, while part (aii) requires the candidates to differentiate between oil and non-oil revenue. Part (b) requires the candidates to discuss problems associated with revenue allocation in Nigeria. Most of the candidates attempted the question and their performance was above average. The common pitfalls were the inability of the candidates to differentiate between public revenue and public receipts and state their sources. Also, few candidates were unable to discuss problems associated with revenue allocation in Nigeria. 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. i. Definition of revenue and public receipts stating two sources each 3

ii. Definition of oil and non-oil revenue with one example each 2 5

b. Identification any five problems associated with revenue allocation 2½ Explanation of five problems identified 7½ 10 Total 15 ICAN/231/Q/B6 Examination No......................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – MAY 2023 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, MAY 18, 2023 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

Housing-for-all Corporation a. Calculation of expected profit of the contract at December 31, 2019 N’000 Total contract revenue 220,000 Total expected contract costs (based on stage of completion method) 180,000 Expected profit of the contract 40,000 Calculation of stage of completion method (in percentage) Formular: = Value of work certified as complted Total contract price X 100 1 140,000 220,000 X 100 1 = 63.64% Determination of the amount to be recognised in Housing-for-all Corporation’s income statement N’000 Revenue (value of work certified) 140,000 Profit taken (N40,000,000 x 63.64%) (25,456) Costs 114,544

b. Calculation of amount to be recognised in the statement of financial position for gross amount due to or from client, Kazua State and accounts receivable N’000 Trade receivable (Amount billed) 130,000 Amount received (100,000) Account receivable 30,000 Gross amount due from client, Kazua State (25,456) Cost incurred 120,000 145,456 Amount billed (130,000) Gross amount due from client (Kazua State) 15,456 94 Housing-for-all Corporation Income statement extracts for the year ended December 31, 2019 N’000 Revenue 140,000 Costs (114,544) Profit 25,456 Housing-for-all Corporation Statement of financial position extracts as at December 31, 2019 Current assets: N’000 Trade receivable 30,000 Gross amount due from client (Kazua State) 15,456

c. Composition of major contract costs as contained in IPSAS 11 i. Site labour costs, including site supervision. ii. Cost of materials used in construction. iii. Depreciation of plant and equipment used on the contract. iv. Cost of moving plant, equipment and materials to and from contract site. v. Cost of hiring plant and equipment. vi. Costs of design and technical assistance that are directly related to the contract. vii. The estimated costs of rectification and guarantee work including expected warranty costs. viii. Claims from third parties.

ix. Costs that are attributable to contract activity in general and can be allocated to the contract on a systematic and rational basis. x. Such other costs as are specifically chargeable to the customer under the terms of the contract.

Examiner’s report Part (a) of the question tests candidates’ knowledge on the determination of the expected outcome of the contract, stage of completion in percentage and amount to be recognised in the income statement. Part (b) requires the candidates to calculate the amount to be recognised as gross amount due to or from their client, amount of trade receivable and to prepare extracts of financial statements, while part (c) requires the candidates to identify what constitutes the composition of contract costs as contained in IPSAS 11. As a compulsory question, all the candidates attempted the question but their performance was below average. 95 The common pitfalls were the inability of the candidates to determine the expected outcome of the contract, stage of completion in percentage and amount to be recognised in the income statement. Also, candidates were unable to calculate the amount to be recognised as gross amount due to or from their client and the amount of trade receivable. Candidates are advised to have adequate knowledge of the relevant provisions of International Public Sector Accounting Standards (IPSAS) and 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. Title 1 Calculation of expected outcome of the contract at December 31, 2019 4 Calculation of stage of completion method (in percentage) 3 Determination of the amount to be recognised in income statement 3 11

b. Calculation of amount to be recognised in the statement of financial position Amount to be recognised in the statement of financial position for gross amount due to or from client 8 Preparation of financial statements extracts Income statement extracts for the year ended December 31, 2019 3 Statement of financial position extracts as at December 31, 2019 2 13

c. Composition of major contract costs as contained in IPSAS 11 Any six (6) points stated 6 Total 30

SECTION B

Documents that must accompany the Appropriation Bill

a. The annual budget must be accompanied by:

i. A copy of the underlying revenue and expenditure profile for the next two years; ii. 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; iii. A fiscal target broken down into monthly collection targets; 96

iv. Measures of cost, cost control and evaluation of result of programmes financed with budgetary resources; v. A fiscal target document derived from the underlying Medium - Term Expenditure Framework (MTEF) setting out the following targets for the relevant financial year;

• Target inflation rate

• Target fiscal account balances; and

• Any other development target deemed appropriate; and vi. A fiscal risk document, evaluating the fiscal and other related risks to the annual budget and specifies measures to be taken to offset the occurrence of such risks.

b. Types of statutory audit responsibility that the Auditor-General for the Federation must carry out in line with Section 109 of Financial Regulations (2009 Edition).

i. Financial audit - Financial audit is determining whether an entity's financial information is presented in accordance with an applicable financial reporting and regulatory frameworks. While doing financial audit, auditors should look for misstatements and errors that can have material impact on the information presented in the financial statements. Misstatements or errors are considered material if they impact the decisions of the intended users of the financial statements.

ii. Appropriation audit - This is to ensure that funds are expended as appropriated by the National Assembly. The definition of appropriation or compliance audit builds on the definition of public sector audit with a specific focus on assessing compliance with criteria derived from authorities. Authorities are the parliamentary decisions, laws, legislative acts, established codes or norms and agreed-upon terms that a public sector entity is expected to comply with in the execution of its roles and responsibilities. The main objective of compliance audit is to provide the intended user(s) with information on whether the audited public entities follow parliamentary decisions, laws, legislative acts, policy, established codes and agreed upon-terms.

iii. Financial control audit – It is an audit process in which all the transactions of the public sector entities are reviewed. The core objective of this procedure is to find out the financial health of the public sector entities and to make certain that all the information provided by the government is accurate. It is to ensure that the laid down procedures are being observed in tendering, contracts and storekeeping with a view to preventing waste, pilferage and extravagance. 97

iv. Value-for-Money or performance audit - To ascertain the level of economy, efficiency and effectiveness derived from government projects and programmes. Performance audit is an independent, objective and reliable examination of whether the government undertakings, systems, operations, programmes, activities or organisations are operating in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvements. Performance audit seeks to provide new information, analysis or insights and where appropriate, recommendations for improvement. ’Value for Money’ (VFM) means using resources in the best way in order to achieve intended objectives. There are three aspects to achieving value for money, often known as the ’3Es’.

• Economy - This means spending money carefully, and not paying more than necessary for resources such as, materials, labour and other expenses.

• Efficiency - Efficiency means using resources in such a way that they produce the greatest possible amount of output. It means getting more from the use of available resources. For example, efficiency in the use of an employee means getting a high rate of output for every hour or day worked.

• Effectiveness - Effectiveness means using resources in such a way as to achieve the desired objectives. Efficiency is of little value unless the output from the system is what the entity wishes to achieve. The purpose of a VFM engagement is to investigate a particular aspect of an entity’s operations and reach a conclusion about whether the entity is obtaining value for money.

Examiner’s report Part (a) of the question requires the candidates to enumerate the documents that must accompany the appropriation bill to the National Assembly while part (b) requires the candidates to discuss types of audit responsibility of the Auditor-General for the Federation in line with Financial Regulations (2009 Edition). Majority of the candidates attempted the question but their performance was below average. 98 The commonest pitfall was the inability of the candidates to enumerate the documents that must accompany the appropriation bill to the National Assembly 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. Documents that must accompany the Appropriation Bill Any four (4) documents 8

b. Types of statutory audit responsibility of the Auditor-General for the Federation Identification of three types of audits 3 Explanation of types of audits identified 9 12 Total 20

a. Description of the procurement process A description of the procurement process for the following items:

i. Procurement process for consultancy services worth N99 million.

• Approval - Requires approval of ministerial board, that is ministries have authority to award contract of between N5 million and N99 million.

• Bidding process- The procurement methods and thresholds of application involve national competitive bidding.

• Prequalification is not applicable.

ii. Procurement process for procurement and installation of sundry items for virtual library in federal government secondary schools including the construction of the building facilities worth N958 million. Approval - It requires Federal Executive Council’s (FEC’s) approval.

• Bidding process- Bidding must be made open to both international and national competitive bidder. The procurement methods and thresholds of application involve national competitive bidding.

• There is need to obtain certificate of no objection to award from Bureau of Public Procurement (BPP).

iii. Procurement process for supply of branded envelopes, files and letter-heads worth N4.2 million. 99

• Approval- It requires the Accounting Officer or Permanent Secretary’s approval.

• Bidding process - Bidding must be nationally competitive.

• Consultant qualification is not applicable.

• Direct contracting is not possible.

b. Preparation of the journal entries Journal entries Dr. Cr. Narration N N Account receivables 220,503,600 To recognise revenue based on valuation certificate submitted Contract revenue 220,503,600 Bank 244,100,000 Upon receipt of cash from Federal Ministry of Housing Account receivables 244,100,000 Contact expenses 294,004,800 To recognise contract expenses to date Account payables 294,004,800 Account payables 294,004,800 Upon payment of cash to suppliers Bank 294,004,800

Workings

i. Account receivables: N12,250,200 × 5 × 6 × 60% = N220,503,600. ii. Payment made to the contractor: N 244,100,000. iii. Estimated costs expended: N294,004,800.

c. i. Provision of financial regulation on delayed contract payment There shall be a provision of interest payment to contractors for delayed payments by ministries or extra ministerial departments. Such payment should be made:

• At the interest rate specified in the contract agreement; and

• If there is delay in the settlement of the claim for more than 60 days, from the date of submission of the contractor’s invoice or valuation certificate and the confirmation or authentication by the relevant ministry.

ii. Punishment for government official An officer of the BPP or the procuring entity who, while performing his procurement duties, contravenes any of the offences under the Act shall be liable on conviction by the Federal High Court to a cumulative punishment of:

• A term of imprisonment of not less than 5 calendar years without any option of fine; and 100

• Summary dismissal from government service Punishment for legal person Any legal person who contravenes any provision of the Act is deemed to have committed an offence and shall be liable on conviction to a cumulative penalty of:

• Debarment from all public procurements for a period of not less than 5 calendar years; and

• A fine equivalent to 25% of the value of the procurement in issue.

Examiner’s report Part (a) of the question requires candidates to describe the procurement process for consultancy services, installation of sundry virtual library items and supply of branded envelopes etc. as specify in the Procurement Act. 2007 while part (b) of the question requires the candidates to prepare journal entries to record contract financial transactions. Part (c) requires candidates to identify provisions of Financial Regulations (2009 Edition), which guides against delay in contract payments and to enumerate punishments that can be meted out to a government official and legal person in case of delay in payment of contracts executed. Majority of the candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to describe the procurement process for each of the items in the question as specified in the Procurement Act. 2007. Candidates were unable to identify the provisions and punishments which guide against and meted out to a government official and legal person in case of delay in payment of contracts executed respectively. Candidates are advised to read widely and ensure they have adequate knowledge of relevant provisions of Financial Regulations (2009 Edition) and other extant regulations. Pathfinder and Study Text of the Institute are relevant learning materials on this aspect of the syllabus for better performance in future examinations. 101

Marking guide Marks Marks a. Description of the procurement process i. Procurement process for consultancy services Any two points on approval and bidding process. 3 ii. Procurement process for procurement and installation of sundry items Any two points on approval and bidding process. 3 iii. Procurement process for supply of branded envelopes, files and letter- heads Any two points on approval and bidding process. 3 9

b. Journal entries Details of four journal entries. 4

c. Provision of financial regulation on delayed contract payment

i. Any two (2) points 3

ii. Punishment for government official Any two (2) points 2 Punishment for legal person Any two (2) points 2 4 Total 20

Fakafiki Federal Transport Agency (FFTA)

a. Computation of NPV Year 0 1 2 3 4 N’000 N’000 N’000 N’000 N’000 Investment (350) Income (Note 1) 0 550 1,350 1,750 (200) Operating costs/year (Note 2) 0 (575) (975) (1,175) (175) Net relevant cash flow (350) (25) 375 575 (375) Discount factor (10%) 1 0.909 0.826 0.751 0.683 Present value (350) (22.73) 309.75 431.83 (256.13) Net present value = N112,720 Decision: Since NPV is positive the project should be accepted. 102

Workings: Note 1 Computation of incremental income base on new fare of N400 Year 1 2 3 4 Estimated demand (No. of passengers) A 7,000 9,000 11,000* 4,000 Old demand (No of passengers) B 5,000 5,000 5,000 4,000 Increase in demand 2,000 4,000 5000* Nil Demand with new fare of N400 N’000 N’000 N’000 N’000 Demand (A X N 400) 2,800 3,600 4,000 1,600 Current revenue (B X N 450) 2,250 2,250 2,250 1,800 Increase (Decrease) 550 1,350 1,750 (200) *Restriction to 10,000 passengers’ capacity. In year 3, even if the passengers are there, the coach cannot accommodate them because the two coaches can only accommodate 5,000 passengers each. In year 4 the old coach is more than sufficient for the passengers.

Note 2 Computation of operating costs Year 1 2 3 4 Additional passengers 2,000 4,000 5,000 0 N’000 N’000 N’000 N’000 Variable cost at N200 per passenger 400 800 1,000 0 Fixed cost 175 175 175 175 Operating cost per year 575 975 1,175 175

b. Computation of IRR Year 0 1 2 3 4 N’000 N’000 N’000 N’000 N’000 Net relevant cash flow (350) (25) 375 575 (375) Discount factor at 30% 0 0.769 0.591 0.455 0.350 Present value (350) (19.225) 221.625 261.625 (131.25) Net Present value = (N17,225) IRR = 10 + 112,720 X (30 -10) 112,720 – (17,225) 103 = 10 + 112,720 x 20 129,945 IRR = 27.35.% Decision: Cost of capital must not be higher than 27.35% for the project to still be acceptable.

c. Computation of Return on Capital Employed (ROCE) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 Initial capital invested x 100%1 Total cash inflows (N’000) = (25) + 375 + 575 + (375) = 550 Total depreciation and initial investment are the same, since there is no scrap value that is, N350 Total accounting profit (N’000) = 550 – 350 = 200 Average Annual Accounting Profit (N’000) = 200/4 = 50 Initial investment (N’000) = 350 ROCE = (50/350) × 100% ROCE = 14.29% Decision: If there is no alternative investment which yields a higher return over and above the 14.29%, the project can be embarked upon.

Examiner’s report Parts (a) and (b) of the question require the candidates to calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) under investment appraisal while part (c) of the question requires the candidates to calculate the Return on Capital Employed (ROCE) based on initial investment. Most of the candidates attempted the question and performance was very poor. The common pitfalls were the inability of the candidates to calculate Internal Rate of Return (IRR) and Return on Capital Employed (ROCE). Candidates are advised to read widely and ensure they have adequate knowledge of relevant methods used under investment appraisal and other regulations relating to public sector accounting 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. 104

Marking guide Marks Marks a. Computation of Net Present Value Calculation of NPV 6 Computation of incremental income 2 Calculation of operating costs 2 10

b. Computation of IRR IRR formula ½ Calculation of PV using higher discounting rate 1¼ NPV figure ¼ Interpolation 1 Calculation of IRR ½ Correct decision ½ 4

c. Computation of ROCE Formula for ROCE 1 Calculation of total cash inflows 1 Calculation of total accounting profit 1 Calculation of Average Annual Accounting Profit 1 Calculation of ROCE 1 Correct decision 1 6 Total 20

SECTION C

a. Arguments in favour of decentralisation of fiscal responsibilities. Decentralisation is a form of organisational structure that functions by delegating decision making capabilities to multiple teams across levels of management. i. Closeness to local residents: Local governments have better understanding of the concerns of local residents being the closest to the people. ii. Removal of bureaucratic leadership: Local decision making is responsive to the people for whom the services are intended, thus encouraging fiscal responsibility and efficiency, especially if financing of services is also decentralised. iii. Unnecessary layers of jurisdiction are eliminated. iv. Inter-jurisdictional competition and innovation are enhanced. v. Democratic institution for the people: Offers a democratic environment where people can have a say in the governance. 105

vi. Promotion of leadership skills: It enables those at the grassroots to gain leadership skills, which can contribute to the growth of the local governance in the long-run. Arguments in favour of centralisation of fiscal responsibilities Centralisation is a form of organisational structure where the decision- making capability rests with the top management. The top management members are saddled with the responsibilities of creating strategies, determine goals and objectives based on which an organisation will function.

i. Focused vision: Communicating and delivering the governments vision and agenda are through clear lines of authority. This is consistent and therefore communication of government’s vision to all sectors of engagement is prompt and undivided. ii. Quick implementation of programmes: A centralised structure of governance allows for faster decision making from the top, since decisions are made by a small group of people and communicated to lower levels of governance. iii. Reduced administrative and compliance costs. Centralised administration generally leads to lower administrative costs associated with financing public services. iv. Economies of scale. Certain services require areas larger than a local jurisdiction for cost-effective provision, for example, public transportation and sewage in metropolitan areas v. Spatial externalities. Spatial externalities arise when the benefits and costs of public services are realised by non-residents. In the case of benefit spill-outs, the jurisdiction providing the service does not consider the proportion of benefits of a public service accruing to non-residents and therefore under-provides such a service. The reverse result is obtained in the case of cost spill- outs, where the public service could not be financed by exporting taxes to other jurisdictions. There are also public services whose benefits are considered national in scope, such as defence and foreign affairs. These services would be best provided by the federal government.

b. Explanation of fiscal and monetary strategies during economic downturn

i. Fiscal policy: It is a collective term for the taxing and spending actions of governments. It is the policy concerning the use of state treasury or government finances to achieve the macro-economic goals. The policies are as follows:

• Deficit financing policy: Deficit financing refers to financing the budget deficit. Budget deficit means excess of government 106 expenditure over government income or taking loan from CBN by government to meet the budgetary deficit. CBN gives loans by issuing new currency notes and an increase in money supply will lead to fall in the value of money. Fall in value of money will in turn leads to increase in price level which must be kept low in order to avoid price rise in the economy. Thus, due to deficit financing, necessary funds are made available for economic growth while managing the consequent level of inflation, which could be on the rise in the country;

• Public expenditure: Public expenditure influences the economic activities of a country which may be of two kinds that is, developmental and non-developmental. Expenditure on developmental activities requires huge amount of capital which cannot be made available by private sector alone. Public expenditure may be in form of’ development of state enterprises; support to private sector; development of infrastructure; and social welfare. Unemployment benefits should be encouraged as well;

• Taxation policy: Taxes are main source of government revenue, which are both direct and indirect. Direct taxes are those which are directly paid by the taxpayers to the government, that is, company income tax, etc., while indirect taxes are paid indirectly by the public to the government, that is, custom duties, stamp duties, etc. The main objectives of taxation policy are: mobilisation of resources; to promote savings; and to bring equality of income and wealth. In situations of reviving the economy during downturn, temporary tax deferrals and tax cuts is carried out. Tariffs are reduced; and

• Public debt: Government needs lot of funds for economic development of the country which cannot be mobilised from taxes alone. Therefore, it becomes inevitable for the government to mobilise resources by resorting to public debt which can be internal debt and external debt. Restructuring and refinancing of debt is a vital option to encourage or reduce debt burden.

ii. Monetary policy: It refers to the use of instruments under the control of the Central Bank of Nigeria (CBN) to regulate the availability, cost and use of money and credit. It is the policy CBN uses to control the supply of money in circulation, which are:

• Bank rate or discount rate: It is the rate at which CBN lends to commercial banks or rediscount their bills. If the CBN rate is increased, then commercial banks also charge higher rate of interest on loans given by banks to public because commercial banks get funds from CBN at higher rate of interest. Higher rate of interest will contract credit in the economy, that is, public will take lesser loans because of higher rate of interest. In the case of 107 downturn, CBN should encourage investments by reducing bank rates so as to reduce interest rates to investors.

• Cash reserve ratio (CRR): It is a certain percentage of bank deposits which banks are required to keep with CBN in the form of reserves or balances. The higher the CRR with CBN, the lower will be the liquidity in the system and vice-versa. The CBN in downturn is expected to reduce the CRR so as to increase liquidity in the system.

• Statutory liquidity ratio (SLR): It is a certain percentage of deposits that should be kept by banks in form of liquid assets. It is kept by banks themselves and they include; government securities; treasury bills; and other securities notified by CBN. If SLR is more, then banks have to keep more part of deposits in specified securities and banks will have fewer surplus funds for granting loans. SLR should be reduced during economic downturn or depression.

• CBN lending rate and reverse CBN lending rate: It is the rate at which CBN lends to commercial banks generally against government securities while reverse lending rate is the rate at which CBN borrows money from commercial banks. Reduction in lending rate helps the commercial banks to get money at a cheaper rate and an increase in lending rate discourages the commercial banks to get money as the rate increases and becomes expensive. As the rates are high, the availability of credit and demand decreases resulting to decrease in inflation. This decrease in lending rate and reverse lending rate is a symbol of tightening of driving monetary policy. However, during economic downturn, it is expected that the government through the CBN will boost the economy rather than tighten monetary policy.

• Open market operations (OMO): It means that the banks control the flow of credits through the sale and purchase of securities in the open market. When securities are purchased by CBN, then CBN makes payment to commercial banks and public, thereby resulting in the public and commercial banks having more money with them, which will expand credit facilities in the economy. Purchase of securities by CBN should be encouraged during downturn of an economy so as to boost the economy and increase aggregate demand.

Examiner’s report Part (a) of the question requires the candidates to explain arguments in favour of decentralisation and centralisation of fiscal responsibilities, while part (b) requires the candidates to explain fiscal and monetary strategies that government at both federal and state level are taking to address their impact of economic downturn. Few candidates attempted the question and their performance was poor. 108 The common pitfalls were the inability of the candidates to explain fiscal and monetary strategies that governments are taking to address the impact of the economic downturn. Candidates are advised 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. Arguments in favour of centralisation and decentralisation Explanation of two arguments to support decentralisation 3 Explanation of two arguments to support centralisation 3 6

b. Explanation of fiscal and monetary strategies during economic downturn Identification of any three fiscal strategies 11/2 Explanation of the three fiscal strategies identified 3 Identification of any three monetary strategies 11/2 Explanation of the three monetary strategies identified 3 9 Total 15

a.

i) Debt refinancing is the replacement of an existing debt by means of another debt with terms and or conditions that are more favourable. In other words, debt refinancing refers to the replacement of existing debt with new debt.

ii) Debt refinancing can be of interest to a federal authority because of the following reasons:

• To take advantage of better interest rate;

• To reduce the monthly repayment amount by entering into new debt with longer terms;

• Under certain circumstances like war and other emergencies, when there is need for large pool of funds and additional tax revenue cannot be raised, debt refinancing becomes inevitable;

• Where actual tax receipts are falling much below the anticipated volume, while expenditure is not showing a corresponding reduction;

• In the case of a project tied; such projects are expected to benefit certain areas or certain sections of the people who can be expected to bear the cost of the project out of the benefit they would receive; and

• To switch from a variable-rate debt to a fixed-rate debt. 109

iii) Project financing is the funding of long-term infrastructure, industrial projects, and public services using a non-resource or limited resource. The debt and equity used to finance the project are paid back from the cash flow generated by the project. Project financing is a loan structure that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights and interest held as collateral.

b. Forms of refinancing debt are: Rate-and-term refinance loans The rate-and term refinance loans are the most popular refinancing of loan. It is used to pay off the original mortgage, which is then replaced with a new loan. Fixed-rate refinancing It sets a monthly payment during the time of the loan. The monthly principal and interest payment are typically higher than a long-term loan. It is also protected from increasing interest rates. Adjustable-rate refinancing An adjustable-rate refinance has a fixed interest rate for about 5-7 years. After that period, its rate adjusts based on the conditions of the market. This loan often includes an interest rate cap, limiting how high the interest rate can increase. It gives some flexibility, especially if there is plan to refinance again in a few-years’ time. Cash-out refinance loans A cash-out refinance loan works best if there is need for some extra cash. It is only used when homes are worth more than what is owed on the existing loan. This type of loan replaces the mortgage by paying it off. It then refinances the current mortgage and allows to keeping the difference of the two mortgages in cash. Cash-in refinance loan In a cash-in refinance loan, the debtor brings in cash to lower the mortgage balance and future interest payments. A cash-in refinance loan improves loan- to-value (LTV) ratio. This makes it easier for future approval. Cash-in refinance loan also allows one to reach the 20% equity threshold, saving thousands of future funds on insurance payments. Consolidation refinancing It combines federal loans in a single new loan amount and the decision to refinance or consolidate depends on the goal and whether there is need to maintain federal loan benefits. It is advisable to consolidate if: the new loan reduces the total interest charges to be paid on all the loans; saves money 110 even after payment of lender’s fees; and can comfortably afford the monthly payments.

Examiner’s report Parts (ai) and (aii) of the question require candidates to explain the terms “Debt refinancing” and why debt refinancing may be of interest to a federal authority, while part (aiii) asks the candidates to explain “Project finance”. Part (b) requires the candidates to explain forms of debt refinancing. Majority of the candidates attempted the question and their performance was below average. The commonest pitfalls were the inability of the candidates to explain why debt refinancing may be of interest to a federal authority and identify and explain the forms of debt refinancing. Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in future examinations.

Marking guide Marks Marks a.

i. Definition of debt refinancing 1 ii. Any two (2) reasons for interest of debt refinancing 4 iii. Definition of project financing 2 7

b. Explanation of forms of debt refinancing Identification of any four (4) forms 4 Explanation of forms identified 4 8 Total 15

Merits of private finance initiatives (PFI): i. Efficiency: There is the belief that the private sector is better at managing investment projects and achieving overall cost efficiencies than the public sector, which is bedeviled with unnecessary bureaucracies.

ii. Extra investment: Extra funding can kick-start more projects thereby bringing about economic and social benefits. The private finance initiatives (PFI) provide private sector funds for projects that might prove difficult for government to finance through higher borrowing and taxes. Projects supporting health or education will improve productive capacity, increase economic growth and can therefore be funded out of future incomes that the projects help to generate. 111

iii. Timely delivery: The private sector is not paid until the asset has been delivered, which encourages timely delivery. PFI construction contracts are fixed price contracts with financial consequences for contractors, if delivered late.

iv. Dynamic efficiency: Private sector is better placed to bring innovation and good design to projects, higher quality of delivery and lowering of maintenance costs. The bidding process for PFI projects creates competition at the point of tendering. Demerits of private finance initiatives i. Debt costs: Private finance has always been more expensive than government borrowing, but since the financial crisis, the difference between the costs has widened significantly. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers.

ii. Inflexibility and poor value for money: Long service contracts may be difficult or costly to change, especially when the management of a project seems to have gone wrong. There have been many stories of flawed projects, for example, private firms contracted out to provide car parking, cleaning and other services in hospitals built and run as part of a PFI. Infrastructure may not be designed to last more than the length of the contract and will need replacing or maintenance at high costs.

iii. Risk: The ultimate risk with a project lies with the public sector (government). Private finance agreements are complicated to organise and there is no guarantee that the private sector will make a better cost- benefit analysis of a project than the public sector.

Examiner’s report The question asks the candidates to explain the merits and demerits of private finance initiatives. Majority of the candidates attempted the question and their performance was poor. The common pitfalls were the inability of few candidates to explain the merits and demerits of private finance initiatives. Candidates are advised to make use of the Pathfinder and Study Text of the Institute for better performance in the Institute’s future examination. 112

Marking guide Marks Marks Merits of private finance initiatives: Identification of three (3) merits 3 Explanation of the merits identified 6 9 Demerits of private finance initiatives Identification of two (2) demerits 2 Explanation of the demerits identified 4 6 Total 15 113 ICAN/232/Q/B6 Examination No……………………. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2023 CORPORATE STRATEGIC MANAGEMENT & ETHICS EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

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