Public Sector Accounting and Finance · May 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