Public Sector Accounting and Finance · November 2023

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

1. Check your pockets, purse, mathematical set, etc, to ensure that you do not have prohibited items such as telephone handsets, electronic storage devices, 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 found with any prohibited item.

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

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

4. Do NOT write anything on your docket.

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

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

7. All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or RED INK will not be marked. THURSDAY, NOVEMBER 16, 2023 114 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA