Public Sector Accounting and Finance · 2024

a. The University of Okoko Consultancy Unit Cash budget for the six months period ended December 31, 2021. July Aug Sept Oct Nov. Dec N’000 N’000 N’000 N’000 N’000 N’000 Cash inflows (Wk.i – iii) Course fees: - New attendees - 1,920 1,920 2,880 1,920 2,880 - Returning attendees - 720 720 1,080 720 1,080 Total cash inflows (A) - 2,640 2,640 3,960 2,640 3,960 Cash out flows Tutor costs (Wk.iv) - 600 1,200 900 1,200 1,200 Staff costs (Wk.v) 100 400 420 420 420 420 Property costs (Wk.vi) 600 630 Food costs (W VII) 110 - 120 122.4 187.2 321.6 General overheads (Wk. viii) 258.5 118.5 118.5 118.5 118.5 118.5 Capital expenditure (Wk. ix) 243 243 Total cash outflows (B) 468.5 1,361.5 2458.5 1,803.9 1,925.7 2,690.1 Net cash flows (A-B) (468.5) 1,278.5 181.5 2,156.1 714.3 1,269.9 Cash b/f - (468.5) 810 991.5 3,147.6 3,861.9 Cash balance before remittance (468.5) 810 991.5 3.147.6 3,861.9 5,131.8 Remittance (Wk. x) - - - - - (2,565.9) Cash c/f (468.5) 810 991.5 3.147.6 3,861.9 2,565.9 Working notes i) Budgeted attendees July Aug Sept Oct Nov Dec Number of courses (A) - 2 4 3 4 4 Provisional attendees(B) - 16 8 16 8 12 Budgeted confirmed attendees per course (C) - 12 6 12 6 9 Budgeted total attendees per month (A multiply by C) - 24 24 36 24 36

ii) Budgeted fees from fully paid attendees July Aug Sept Oct Nov. Dec N’000 N’000 N’000 N’000 N’000 N’000 Standard fees (A) - 120 120 120 120 120 No. of attendees for month paying standard fee (2/3 budgeted of total attendees per month) (B)

- 16 16 24 16 24 Total fully paid fees (A X B) - 1,920 1,920 2,880 1,920 2,880 96

iii) Budgeted fees from returning attendees July Aug Sept Oct Nov. Dec N’000 N’000 N’000 N’000 N’000 N’000 Standard fees (A) - 90 90 90 90 90 No. of attendees for month paying standard fee (1/3 of budgeted total attendees per month) (B)

- 8 8 12 8 12 Total fully paid fees (A X B) - 720 720 1,080 720 1,080

iv) Total tutor costs July Aug Sept Oct Nov. Dec No. of courses (A) - 2 4 3 4 4 Cost per course (N’000) (B) - 300 300 300 300 300 Total cost per month (N’000) (A X B) - 600 1,200 900 1,200 1,200

Note: Cost of assistant paid by Emeritus Professor Omopinleola is irrelevant because he pays his assistant directly from his own course fee.

v) Staff costs July Aug Sept Oct Nov. Dec N’000 N’000 N’000 N’000 N’000 N’000 Increase in wages by 5% from September 100 400 420 420 420 420

vi) Rental payments Current quarterly payments = N2,400,000/4 = N600,000 per annum. Annual rental payment from December = N2,400,000 x 1·05 = N2,520,000. Therefore, quarterly rent is N2,520,000/4 = N630,000

vii) Food costs (Tea break and lunch) July Aug Sept Oct Nov. Dec Budgeted attendees (Wk.i) (A) - 24 24 36 24 36 Food cost per head (N’000} (B) - 5 5.1 5.2 5.3 5.4 Total food cost per month (N’000) (A X B) - 120 122.4 187.2 127.2 194.4

viii) General overheads Business rates = N835,000/10 = N 83,500 per month. Fuel = N420,000/12 = N35,000 per month. Therefore, in July fuel cost = N35,000 + (4 x N 35,000) = N175,000. Total = N258,500 for July and N118,500 for each month of August to December. 97

ix) Capital expenditure Total cost = 3 X (180,000 x 90%) = N486,000 Therefore amount payable in August and October = N486,000/2 = N243,000

x) Remittance N Balance b/f as at December 31, 2024 3,861,900.00 December net cash flows 1,2690,100.00 Total 5,131,800.00 Payable in December (N5,131,800/2) 2,565,900.00

b. Steps in Planning, Programming and Budgeting Systems (PPBS) Steps in PPBS are as follows:

(i) Identification and enumeration of goals and objectives of the organisation; (ii) Defining the total system in detail, including objectives, environment, available resources, the programmes and their objectives, etc; (iii) Planning and analysis involve continuous process of developing, comparing and analysing alternative programmes, so as to evolve the most appropriate package for the organisation; (iv) Development of the appropriate measures of performance for the programmes of the organisation; (v) The agreed package of “programmes” complete with resource requirements and expected results are expressed in the form of “programmed budgets”; (vi) In reporting and controlling; planning, programming and budgeting system requires sophisticated information service, which is able to monitor the progress made towards meeting the organisational objectives. Performance evaluation, therefore, emphasises the attainment or non-attainment of the desired objectives, rather than the amount spent, which is the focus in traditional budgeting system; and (vii) The budgeting system requires development in each year, of a multi- year programme and financial plan.

c. Characteristics of performance budgeting systems The characteristics of performance budgeting are as follows: (i) Classification of budgets in terms of functions and activities; (ii) Measurement of work done or output provided by each activity; (iii) Expression of the budget in a way which allows direct comparison between a project’s cost and the anticipated income or benefit; an 98

(iv) Monitoring of actual cost and performance against the budgeted results or expectations.

Examiner’s report The question is in three parts. Part (a) of the question tests candidates’ knowledge on the preparation of cash budget. Part (b) requires the candidates to enumerate the steps in Planning, Programming and Budgeting System (PPBS), while part (c) requires the candidates to identify characteristics of performance budgeting system. All the candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to enumerate the steps in Planning, Programming and Budgeting System (PPBS), Also, some candidates were unable to calculate the 50% cash balance to be remitted to the University’s account in December, 31, 2021. Candidates are advised to have adequate knowledge of the relevant provisions of the syllabus and to make use of Pathfinder and the Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Preparation of cash budget: Calculation of total cash inflows 3¾ Calculation of total cash outflows 8 Calculation of net cashflows 1½ Calculation of cash balance carried forward 4¼ Workings: Calculation of total fully paid fees by attendees 1¼ Calculation of fully paid from returning attendees 1¼ 20

b. Steps involved in PPBS. Each of the 7 steps at 1 mark each 7

c. Characteristics of performance budgeting Any three (3) features at 1 mark each 3 Total 30 99

SECTION B

a. Disclosure requirements for investment in associates Disclosures that should be made in the accounts of investments in associate are as follows: (i) The fair value of investment in associate for which there are published price quotations; (ii) Summarised financial information of associates; (iii) The reasons why investor holds less than 20% of voting power in investee but concludes that it has significant influence; (iv) The reasons why investor holds more than 20% of voting power in investee but concludes that it does not have significant influence; (v) The reporting date of the financial statements of an associate, which such financial statements are used in applying the equity method and are as of a reporting date, or for a period that is different from that of the investor, and the reason for using a different reporting date or different period; (vi) The nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements or regulatory requirements) on the ability of associates to transfer funds to the investor in the form of cash dividends, or similar distributions, or repayment of loans or advances; (vii) The unrecognised share of losses of an associate, both for the period and cumulatively, if an investor has discontinued recognition of its share of losses of an associate; (viii) The fact that an associate is not accounted for using the equity method; and (ix) Summarised financial information of associates, either individually or in groups that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues and surplus or deficits.

b. Ways of comparison of figures in respect of two or more years

(i) Straight forward criticism or analytical review Figures in respect of two or more years may be compared and percentage differences obtained. Comparison of figures may be undertaken in any of the following ways:

• Previous years’ figures with those of the current year;

• The statistics of a period this year with those of a similar period last year; 100

• Figures within the year’s 1st quarter with those of the fourth quarter of the same year; and

• It may be percentage representation within the year. For example, salary expenses may be expressed as a ratio of total expenses. The above stated methods are popular with public sector organisations. Other ways of analysing financial statements under this method are:

• Share of capital expenditure as a percentage of non-debt expenditure;

• Share of capital expenditure as a percentage of total expenditure;

• Share of recurrent expenditure as a percentage of total expenditure;

• Share of statutory allocation as a percentage of total revenue; and

• Share of internally generated revenue as a percentage of total revenue.

(ii) Performance reports as per IPSAS 24 According to IPSAS 24, entities are required to present a comparison of the budgeted amount for which it is held publicly accountable and actual amount, either as a separate additional financial statement or as an additional budget column in the financial statements currently presented in accordance with IPSASs. The comparison of budgeted and actual amounts shall be presented separately for each level of legislative oversight:

• The original and final budget amounts;

• The actual amounts on a comparable basis; and

• By way of the note disclosure, an explanation of material differences (variances) between the budget for which the entity is held publicly accountable and actual amounts, unless such explanation is included in other public documents issued in conjunction with the financial statements and a cross reference to those documents is made in the notes.

(iii) Cash flow statements Neither the statement of profit or loss account not statement of financial position gives a satisfactory explanation of how a business obtains and uses its cash. The cash flow statement is very revealing of the core operations of a Government, Parastatal or Board on the affordability or otherwise of adequate liquid resources. This is the statement that shows the amount of cash generated by an organisation and the utilisation of such cash for that period. The major sources of cash inflows and outflows into the public sector according to IPSAS 2 are:

• Operating activities;

• Investing activities; and

• Financing activities 101

(iv) Ratio analysis Financial ratio analysis is the process of calculating financial ratios, which are mathematical indicators calculated by comparing key financial information appearing in financial statements of a public sector entity and analysing them to find out reasons behind the entity’s current financial position and its recent financial performance and develop expectation about its future outlook. Ratio analysis involves expressing one figure as a ratio or percentage of another, to bring out the weakness or strength in an organisation’s affairs.

Examiner’s report The question is in two parts. Part (a) of the question requires the candidates to identify and explain disclosures that should be made in the accounts on investments in associates, while part (b) requires the candidates to identify and explain ways through which comparison of figures in respect of two or more years can be derived. Few candidates attempted the question and their performance was below average. The commonest pitfall was the inability of the candidates to properly identify and explain ways through which comparison of figures in respect of two or more years can be derived Candidates are advised to make use of ICAN Pathfinders and the Study Text for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Disclosure requirements for investment in associates Any four disclosures at 2 marks each 8

b. Ways of comparison figures in respect of two or more years: Identification of any three ways at 1 mark each 3 Explanation of any three ways identified at 3 marks each 9 12 Total 20

a. An unapplied mandate is when a payment is made through a mandate to a bank which is reflected in the credit side of a cash book as being paid out but not reflected in the bank statement as a result of the following reasons: i) Delay arising from the failure of e-payment network put in place to facilitate payment; ii) Delay from the bank in posting the mandate; and 102

iii) Failure of the bank to post according to the mandate instructions. Whereas uncredited cheque is a cheque paid into the bank but has not been cleared as at the date of the bank balance. Since the cheque has not been cleared, the bank does not add the value of the cheque to the balance in the account. However, in the cash book of the business the deposit would have been included as part of the cash in the bank.

b. (i) University of Igbokuwenu, Abia Bank reconciliation statement for the month ended March 31, 2020 N N Cash book balance for the month ended March 31, 2020 12,063,000 Add: Unpresented/unapplied mandates (Wk1) 225,000 Receipts in bank but not in cash book (Wk 2) 17,310,000 17,535,000 Less: Receipts in cash book but not in bank (Wk 3) 3,324,000 Debits in bank not yet in cash book (Wk 4) 45,000 3,369,000 Balance as per bank statement 26,229,000

Workings notes: i) Unpresented/unapplied mandates Mandate No. Beneficiary N N 0671420 Solar Tech 90,000 0002428 Green Laud 120,000 0021462 S-Publishers 15,000 225,000

ii) Receipts in bank but not in cash book N N 2% Interest on an endowment fund of N127,500,000 2,550,000 Investment income 60,000 Aid received by the alumni of the university 10,200,000 USAID donations 4,500,000 17,310,000

iii) Receipts in cash book but not in bank N N B-Engineering services registration fees 24,000 Dishonoured cheque 3,300,000 3,324,000

iv) Debits in bank not yet in cash book N N Bank charges 15,000 Commission on turnover (COT) 30,000 45,000 103

(ii) Challenges of bank reconciliation statement under e-payment system. The following are the challenges of bank reconciliation under the e-payment system: • Network failure which slows down the pace of reconciliation process;

• The mandate numbers in the cash book can be posted differently from the ones of the bank statements resulting in difficulty in matching items in the cash book with the ones in the bank statements;

• Splitting of items on a mandate by the banks. For example, a mandate for a total payment of N150,000 to three individuals equally, can be split by the bank as three different payments of N50,000 each in the bank;

• Absence or inadequate description of transactions in the bank statement;

• Delay in obtaining bank statements from the banks;

• Posting errors on the part of the banks; and

• Posting errors from the schedule officers of the MDAs.

Examiner’s report The question is in two parts. Part (a) of the question requires candidates to differentiate between unapplied mandate and uncredited cheques. Part (bi) of the question requires the candidates to prepare bank reconciliation statement of a university, while part (bii) requires candidates to identify and explain the challenges of bank reconciliation statement under the e-payment system. Most of the candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to differentiate between unapplied mandate and uncredited cheques. They were also unable to identify and explain the challenges of bank reconciliation statement under the e-payment system. Candidates are advised to read widely and ensure they have adequate knowledge of the relevant sections of the syllabus. They should also make use of Pathfinders and the Study Text of the Institute and other relevant learning materials on this aspect of the syllabus for better performance in future examinations. 104

Marking guide Marks Marks a. Difference between unapplied mandate and uncredited cheque: Explanation of unapplied mandate 2½ Explanation of uncredited cheque 2½ 5 b.i. Preparation of bank reconciliation statement Correctly stating the title. ½ Calculation of balance as per bank statement. 4 Calculation of unpresented or unapplied mandates. 1½ Calculation of receipts in bank not in the cash book. 2 Calculation of receipts in the cash book not in the bank. 1 Calculation of debits in the bank but not in the cash book. 1 10

ii. Challenges of bank reconciliation under e-payment Any five (5) challenges at 1 mark each 5 Total 20

a. Characteristics of National Chart of Accounts (NCOA): The NCOA is based on the following key characteristics:

(i) The NCOA was designed after due consultations with all the Local Government Councils, States and Federal Government of Nigeria in consideration with their peculiar needs; (ii) It is expandable and flexible; (iii) Each item has a unique code; (iv) It is used for both budgeting and accounting; (v) It is in compliance with IPSAS cash and accrual bases; (vi) It is in compliance with Government Financial Statistics(GFS) 2001; and (vii) It is incompliance with Classification by Functions of Government (COFOG).

b. Structure of National Chart of Accounts (NCOA)

(i) Administrative segment: The Administrative segment assigns responsibility for each transaction whether revenue centre (receipt) or cost centre (payment). (ii) Economic segment: Every receipt must be from a particular source for example, contractor’s registration fee. Likewise, every expense must be on a particular item or object for example, purchase of drugs and medical supplies. It answers “What” question of every transaction. (iii) Functional segment: Functional classification categorizes expenditure according to the purposes and objectives for which they are intended. Functional Classification or Classification by Functions of Government (COFOG) is defined as a detailed classification of the functions, or socio- 105 economic objectives, that general government units aim to achieve through various kinds of outlays. Functional classification organises government activities according to their broad objectives or purposes (for example, education, social security, housing, etc.). Government expenditure is measured according to internationally recognised functional categories. A functional classification is especially useful in analysing the allocation of resources among sectors. Functions and sub- functions will be assigned at the point of budget and planning for every transaction or initial set up. (iv) Programme segment: The programme classification identifies various set of activities to meet specific policy objectives of the government for example, pre-primary education, poverty alleviation and food security. (v) Funds segment: The fund segment addresses the “Financed by” element of a transaction. Fund refers to the various pools of resources for financing government activities. It will fast track the implementation of IPSAS particularly with respect to the full disclosure of government revenue including external assistance. (vi) Geographic segment: It addresses the “Where” (location/station) element of every transaction. It is for location or physical existence of transaction so that an analysis of government budget and expenditure along the various geopolitical zones, states, and local government councils in the country can be done. The use of geographic codes will make it easier for agencies with over sight function like monitoring and evaluation (M&E) mandates to locate projects across the country.

d. The steps for budgeting with National Chart of Accounts (NCOA) All the six segments of the chart of accounts must be completed on the budget entries, even if the value for a given segment is in active. Onynumeric values can be budgeted. Meanwhile, the following steps should be taken to ensure completeness of using the Chart of Accounts for budgeting:

(i) Identify the government institution(cost and revenue centre) from the hierarchy of administrative and codes provided in the chart of accounts; (ii) Identify the economic items that would be executed during the fiscal year; (iii) Identify the functions intended to be performed by government institutions (revenue and cost centre); (iv) Identify the programmes intended to be carried out by the government institution; (v) Determine the sources of financing the budgeted amount for each budget line; and (vi) Identify the planned location for the economic transactions or government institution. 106

Examiner’s report The question is in two parts. Parts (a) and (b) of the question require the candidates to state the characteristics of National Chart of Accounts (NCOA) and its structures for budgeting. while part (c) of the question requires the candidates to identify and explain four steps for budgeting with National Chart of Accounts. Majority of the candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to state the characteristics of National Chart of Accounts (NCOA) and its structures for budgeting, while in part (c), the candidates were unable to identify and explain four steps for budgeting with National Chart of Accounts. Candidates are advised to read widely and ensure they have adequate knowledge of relevant regulations relating to public sector accounting for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Characteristics of National Chart of Accounts (NCOA): Stating any four characteristics of NCCOA at 1 mark each 4

b. Structure of National Chart of Accounts: Identification of the six structures at ½ mark each 3 Explanation of the six structures at 1½ marks each 9 12

c. The steps for budgeting with National Chartof Accounts: Explanation of any four steps at 1mark each 4 Total 20

SECTION C

a. Principles of revenue allocation.

(i) Derivation: This principle was originally applied to the proceeds of export taxes on agricultural produce. The principle asserts that the state from which the bulk of the revenue is obtained should receive extra share over and above what other states receive.

(ii) Even development: The objective of government is that the Federation itself should grow and develop at an optimum rate and that each of the 107 constituent states should grow and develop at the optimum (not necessarily equal) rate. The principle requires that growth and development should be spread so that serious inequalities or imbalances are reduced in the Federation. These may be achieved by sacrificing efficiency in the form of a reduced overall growth.

(iii) Need: The rate of growth and development a state is able to achieve depends on the revenue the state is able to generate. It requires financial as well as other resources not only to maintain its existing facilities but also to develop additional capacities. Given a set of these other resources, a state requires funds to enable it realise its potential. When the need of a state is compared with the need of others, it may be necessary to transfer financial resources from one state to another in the interest of efficiency.

(iv) National interest: This principle is used residually by the highest level of government to intervene and transfer funds to lower levels or units in the lower levels to serve various considerations. It lies therefore in the sphere of discretionary grants to be administered by the highest tier, that is, government of the Federation.

(v) Independent revenue: The principle is of the view that each level of government should be able to raise and keep some revenue for its use. The bulk of the revenue of the state revenue comes from what is raised and collected by the Federal government. The main sources left to the state governments are those on personal income taxes, capital gains tax and stamp duties, which should be exploited.

(vi) Continuity of government services: The principle suggests that each level of government has a certain minimum responsibility and that the level of services provided should not be allowed to fall below a certain standard. Where a state is unable to function effectively due to lack of funds, such a state should be assisted with federally collected revenue.

(vii) Equality of state: All men are created equal but are endowed differently. Similarly, states are created equally but they arrive, at creation and through passages of time with different endowments of economic, financial and political power. The principle asserts that revenue sharing among the states should be done on equal basis. 108

(viii) Equality of access to development opportunities: This was introduced to correct unequal endowments of the states. The principle asserts that preferential treatment should be given to those states which by some measures of development lag behind others or fall below a certain norm.

(ix) Absorptive capacity: It represents the capacity of the state to make proper use of funds. It is on exceptional and efficiency grounds, that is, funds should go to those states that are best able to utilise them.

(x) Population: This principle asserts that since government is about people, that development is also about people and that the essence of government should be the welfare of the people. Therefore, states with larger populations should receive extra share above others with smaller populations.

(xi) Tax effort: The principle, which applies in most federation, is designed to encourage states to exploit their tax capacities. The realisation of a state's potential in respect of tax revenues will widen its development possibilities.

(xii) Fiscal efficiency: This principle asserts that states should minimise the cost of fiscal administration or obtain maximum revenue from a given cost. Fiscal efficiency reflects not only on the ability to raise taxes and collect them, but it reflects also the structure of the tax base itself as well as the overall administrative machinery of government.

b. Factors responsible for revenue sharing problems

(i) Over-dependence on oil revenue. The advent of oil in Nigeria and its high yielding revenue generation tendency has continued to undermine the development of the hitherto buoyant agricultural 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 on thereby becoming a mono-product economy. The current revenue sharing formula encourages laziness and idleness as states rely heavily on the federal allocation- a situation that makes most states, with the exception of Lagos parasitic in nature feeding voraciously on Federation Account.

(ii) Politics of revenue sharing formular. Revenue sharing among the component units of Nigerian federation has been, from the inception, replete with agitations, controversies and outright rejections due to the nature of the 109 politics that is involved in it. The process of revenue sharing is inundated with conflicting criteria that were, often times, rejected by majority of the states. The determining factor in revenue allocation strongly revolved around political rather than economic criteria, thereby making the revenue allocation issue in Nigeria contentious and thorny.

(iii) Agitation for resource control. The historical facts of the use of the principle of derivation (emphasised earlier and de-emphasised later) have been 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 its 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 pipes and installations, desperations and high scale violence.

(iv) Increasing fiscal units. The rapid changes in the number of fiscal units that is not necessitated by guided economic and political philosophy led to creation of states that are fiscally unviable and consequently increased demand for increased share of "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 revenue generation. 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.

(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 centred not on who should raise but how the proceeds should be shared. Therefore, expenditure and tax/revenue assignment is inundated with ambiguity and inefficiency. A good example is the case of Lagos State Ministry of Transportation (MOT), which became a legal tussle between the government and some activists. 110

(vi) Lack of will. The absence of sincere desire on the part of the 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 The question is in two parts. Part (a) of the question requires the candidates to state and explain principles that guide revenue allocation in Nigeria, while part (b) requires the candidates to explain factors that led to the controversies surrounding revenue sharing in Nigeria. Majority of the candidates attempted the question and their performance was above average. The common pitfalls were the inability of the candidates to state and explain principles that guide revenue allocation in Nigeria, while in part (b) few of the candidates could not satisfactorily explain factors that led to the controversies surrounding revenue sharing in Nigeria. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Principles of revenue allocation: Identification of any five principles at ½ mark each 2½ Explanation of the five principles identified at 1mark each 5 7½

b. Factors responsible for revenue sharing: Identification of any five factors at ½ mark each 2½ Explanation of the five factors identified at 1mark each 5 7½ Total 15 111

a. Investment appraisal under Profitability Index (PI) Cash outflow = N15,000,000. Annual cash inflows =N3,800,000 r = discount rate (Cost of borrowing) = 12% n = number of years = 6 years Cumulative discount factor formular = 1- (1+r)-n r = 1- (1 + 0.12)-6 0.12 = 4.11 Years Cash flow DF (12%) Present value N N 0 (15,000,000) 1.0 (15,000,000) 1 - 6 3,800,000 4.11 15,618,000 Profitability Index (PI) = Future cash inflows Cash outflow in year 0 Profitability Index (PI) = 15,618,000 15,000,000 = 1.041 Decision: Based on the above computation, the project should be accepted because the PI is greater than one.

b. Profitability index (PI) Advantages of profitability index (i) It recognises time value of money. (ii) It is a variant of the NPV method. It therefore requires the similar computation as in NPV method. (iii) It is a relative measure of a project’s profitability since the present value of cash inflows is divided by the present value of cash outflows. (iv) It is generally consistent with the wealth maximisation principle. 112 Disadvantages of Profitability index (PI) (i) It can only be used to choose projects under simple, one period, capital constraint situation. (ii) It does not work with mutually exclusive projects as only dependent projects are being considered. (iii) The technique is not popular in public sector project appraisal.

Examiner’s report The question is in two parts. Part (a) of the question requires candidates to calculate and advice the Chairman of a Local Government whether or not to undertake a project using Profitability Index (PI) technique of investment appraisal, while part (b) asks the candidates to identify the advantages and disadvantages of profitability index as a technique for project appraisal. Majority of the candidates attempted the question and their performance was below average. The common pitfalls were the inability of the candidates to calculate and give advice whether or not to undertake a project using Profitability Index (PI) technique of investment appraisal. Some candidates could not correctly state the advantages and disadvantages of profitability index technique. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the future examinations.

Marking guide Marks Marks a. Investment appraisal under Profitability Index (PI) Calculation of present value of cash outflow in year ’0’ 1½ Calculation of present value of future cash inflows using correct formular 4 Calculation of Profitability Index (PI) using correct formular 2½ Decision 2 10

b. Advantages and disadvantages of Profitability Index: Identification of any three advantages at 1 mark each 3 Identification of any two disadvantages at 1 mark each 2 5 Total 15 113

a. Categories of public finance

(i) Public revenue: This deals with the various sources of revenue that is available to the government, the comparative advantages and disadvantages of each of the source of revenue as well as the principles that govern them. Among the sources of revenue to the government are taxation, non-tax revenue and others. Of all the sources of revenue, taxation is the most important and deserves special treatment.

(ii) Public expenditure: This is an important tool in the hands of the policy makers as it can be used to achieve various economic objectives of the government such as allocation of resources, redistribution of income and wealth, stabilisation of prices and employment as well as achieving optimum growth rate. It is through public expenditure that government contributes to the financial flows of the economy, regulates the patterns of demand and supply, as well as implement welfare programmes.

(iii) Financial administration. This involves the budget, its formulation and execution of the various objectives specified in the budget. It also includes the government accounting, auditing as well as the other financial operations of the public authorities.

(iv) Economic growth and stabilisation. The objective of economic growth and stabilisation is usually the major focus of government policies. To that extent, it is the concern of public finance that there should be prudent utilisation of scarce resources to ensure the achievement of these objectives.

(v) Federal finance. The practice of fiscal federalism necessitates the assignment of expenditure and revenue responsibilities among the multi-levels or tiers of government and the attendant challenges and possible solutions of inter- governmental financial flows.

(vi) Public debt management: This involves the borrowing, repayment and management of government debt to finance budget deficits and fund public investments. Governments issue debt securities (e.g. treasury bills, bonds, notes) to raise funds from domestic and international capital markets.

b. Rationale for public sector in the economy Government involvement in the economy can be explained by any or combinations of these factors.

(i) Political and social ideologies: 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 114 importantly, market forces left alone cannot perform all economic functions. Therefore, there is need to guide, regulate and supplement market forces under certain circumstances.

(ii) 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, 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.

(iii) 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.

(iv) 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.

(v) Externalities: 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.

(vi) 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 required to achieve these objectives.

Examiner’s report The question is in two parts. Part (a) of the question requires candidates to identify and explain categories of public finance, while part (b) of the question asks the candidates to discuss rationale for public sector in the economy. Majority of the candidates attempted the question and their performance was average. The commonest pitfall was the inability of few candidates to identify and explain categories of public finance. 115 Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examination.

Marking guide Marks Marks a. Categories of public finance Identification of the five categories at ½ mark each 2½ Explanation of the five categories identified at 1mark each 5 7½

b. Rationale for public sector in the economy Identification of the five rationale at ½ mark each 2½ Explanation of the five rationale identified at 1 mark each 5 7½ Total 15 116 ICAN/241/Q/B6 Examination No......................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – MAY 2024 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, wrist watches 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 16, 2024 117 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

a. i Medical Research Council (MRC) Journal entries Recognising the lease at inception S/N Details Dr Cr Narration Lessee: ₦ ₦ i. Lease PPE (Generator) 19,938,350 To recognise lease Provision for interest 9,161,650 assets and associated Lease liability 29,100,000 liability

ii. Lease liability 4,850,000 Recognition of first Bank 4,850,000 instalment paid at the end of year 2020

iii. Interest expense 1,526,941.67 Interest due in year Provision for interest 1,526,941.67 one iv. Depreciation charges 3,323,058.33 To recognise Accumulated depreciation 3,323,058.33 depreciation charges charges for year 2020 Lessor i. Account receivable 19,938,350 To recognise asset Lease asset (Generator) 19,938,350 leased to the lessee at inception

ii. Bank 4,850,000 To recognise equal Account receivable 3,323,058.33 instalment received in Interest earned 1,526,941.67 year 2020 ii This is a clear case of finance lease because of the following:

• The lease terms equal the useful economic life of the equipment;

• The present value of the minimum lease payment (₦19,938,350) exceeds 90% of the fair value of the asset which is ₦22,000,000

• The present value of annuity of 12% = 4.111 x N4.85m = N19,938,350 98

bi. Non-investment properties

• Property held for sale in the ordinary courses of operations or in the process of construction or development for such sale.

• Property being constructed or developed on behalf of third parties e.g., where a service department of a ministry enters into construction contracts with entities external to its government.

• Owner-occupied property including property held for future use as owner-occupied property held for future development as subsequent use as owner-occupied property. Property occupied by employees such as housing for military or police personnel.

• Property that is being constructed or developed for future use as investment property. Until construction or development is complete, at which time the property become investment property; such property does not meet investment property status.

• Property held to provide a social service and which also generates cash flows; and

• Property held for strategic purpose, which could be accounted for in accordance with IPSAS 17 (Property, Plant and Equipment).

ii. Afonja State Development Property Corporation Journal entries Plaza at Central Business District Details Dr Cr Narration N’000 N’000 Investment property 990,000 To recognise the investment property in the books Bank 990,000 Accumulated depreciation 378,000 To close the investment pr property account Revaluation account 612,000 Investment property 990,000 Investment property 1,050,000 To reinstate the new value of the investment property Revaluation account 612,000 Revaluation surplus 438,000 Building at Kulende Estate Details Dr Cr Narration N’000 N’000 Investment property 508,050 To recognise the investment property in the books Bank 508,050 99 Swapping of 2-storey building Details Dr Cr Narration N’000 N’000 Investment property 23,000 To recognise the investment Bank 23,000 property in the books Swapped investment property New investment property 25,000 To recognise gain on the Existing investment property 23,000 swapping of investment Gain on exchange 2,000 property

b. Journal entries for state-owned university S/N Details Dr Cr Narration N’000 N’000 i. PPE- (Office equipment) 72,873.68 The cost of assets is made up of the purchase cost plus all Bank 54,655.26 attributable cost. Accounts payable 18,218.42 Accounts Payable 18,218.42 On payment of outstanding Bank 18,218.42 debt ii. PPE 413,000 This is treated as part of take- Take over grant 413,000 off grant Impairment charges 169,000 Impairment on carrying PPE 169,000 amount of PPE taken over iii. PPE – Forensic laboratory 1,300,000 Donation received during the year Aid and grant received 1,300,000

iv. Impairment charges 204,450 Being difference between the Accum. Impairment 204,450 carrying amount and the fair value of the building 100

v. PPE 1,500,000 Acquisition of PPE Bank 1,500,000 Revaluation account 1,140,000 To close the account of the Accum. Depreciation 360,000 carrying amount as well as Building 1,500,000 the corresponding accumulated depreciation Building 110,000 To reinstate the current value Revaluation surplus 110,000 of the PPE vi. PPE 24,750 Bank 24,750 Purchase of PPE PPE disposal account 24,750 To close the account of the Motor vehicle Account 24,750 motor vehicle Accum. depreciation 11,325 To close accumulated PPE disposal account 11,325 depreciation account Bank 6,000 To recognise proceeds from the Loss on disposal 7,425 sale of the motor vehicle PPE disposal account 13,425

c. The measures used in identifying impairment of non-cash generating units include:

i. External sources of information

• Cessation, or near cessation, of the demand or need for the services provided by the asset;

• Significant long-term changes with an adverse on the entity have been taken place during the period or will take place in the near future, in the technological, legal or government policy environment in which the entity operates.

ii. Internal sources of information

• Evidence is available of physical damage of an asset;

• Significant long-term changes with an adverse on the entity have taken place during the period or are expected to take place in near future, in the extent to which, or manner in which, an asset is used or expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date; 101

• A decision to halt the construction of an asset before it is completed or in a usable condition; and

• Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected.

Examiner’s report The question is in four parts. Part (a) of the question tests candidates’ knowledge on the preparation of journal entries in the book of the lessor and lessee at the inception of the lease in accordance to IPSAS 13 - Leases. Part (b) requires the candidates to identify the features of non-investment properties and prepare journal entries in accordance to IPSAS 16 -Investment Properties. Part (c) requires the candidates to prepare journal entries on some transactions as related to property, plants and equipment in accordance to IPSAS 17 - Property, Plants and Equipment, while part (d) requires to enumerate measures by which asset impairment can be determined in accordance with IPSAS 21 - Impairment of Non - Cash Generating Units. All the candidates attempted the question and their performance was below average The common pitfalls were the inability of the candidates to understand the provisions of IPSAS 13 - Leases; IPSAS 16 - Investment Properties; IPSAS 17 - Property, Plants and Equipment; and IPSAS 21 - Impairment of Non - Cash Generating Units. Candidates are advised to have adequate knowledge of the relevant provisions of the syllabus and to make use of the Institute’s Pathfinder and the Study Text for better performance in the Institute’s future examinations.

Marking guide Marks Marks ai. Journal entries Correct journal entries - Lessee 3¼ Correct journal entries – Lessor 1¾ ii. Type of lease and justification Type of lease at 1 mark 1 Any two (2) justifications at ½ mark each 1 7 b.i. Description of non-investment properties Any five (5) descriptions at 1 mark each 5

ii. Journal entries Correct journal entries for Plaza 2 Correct journal for building at Kulende ½ Correct journal entries for swapping of investment properties 2 4½ 102

c. Journal entries for state-owned university Correct journal entries 8½

d. Sources of information for impairment Any five sources at 1 mark each 5 Total 30

SECTION B

a. The responsibilities of Micro Pension Contributor shall include:

i. Opening of a Retirement Savings Account (RSA) with any Pension Fund Administrator (PFA) of choice; iii. Making contributions into RSA in accordance with the relevant guidelines; iv. Requesting for RSA statement from PFA; v. Updating RSA information on request; vi. Appointing a next of kin; vii. Choosing the platform for making contributions; viii. Deciding to make contingent withdrawals; ix. Choosing the mode of accessing pension (programmed withdrawal or annuity) from micro pension plan; and x. Demanding for adequate customer service as provided in the consumer protection framework issued by the Commission.

b. The following persons not below 18 years of age with source of income shall be eligible for participation in micro pension plan under Section 2(3) of the Pension Reform Act 2014:

i. Criterial for eligibility for participating in micro pension plan

• Self-employed persons that belong to a trade, profession, cooperative or business association;

• Self-employed persons with a business registration as a company, partnership or enterprise.

• Employees operating in the informal sector who work with or without formal written employment contract.

• Other self-employed individuals.

• Micro Pension Contributors shall be resident in Nigeria. 103

ii. The following documents shall be provided at the point of registration:

• Evidence of membership of a registered association, union or cooperative society

• Certificate of business registration

• Certificate of incorporation

• Letter of employment

• Bank Verification Number (BVN)

• Other documentation as may be specified by the PFA

iii. Provisions of Pension Reform Act (PRA) 2014 on contingent withdrawal

• The micro pension contributor shall be eligible to access the portion of his/her contribution available for withdrawal 3 months after making the initial contribution.

• Subsequently, the micro pension contributor can only make withdrawals once in a week from the balance of the contingent portion of the RSA.

• The micro pension contributor may withdraw the total balance of the contingent portion of RSA including all accrued investment income thereto.

• The micro pension contributor may choose to convert the contingent portion of the contributions to the retirement benefits portion at the end of every year.

• The time frame for processing and payment of contingent withdrawals shall not exceed two working days.

• Payment shall be made only to the Micro Pension Contributor’s designated bank account.

• The PFA shall approve and pay all requests for contingent withdrawals.

• The PFA shall notify the Commission of all payments made monthly.

• Contingent withdrawals shall be subject to applicable tax laws in accordance with the provisions of Section 10(4) of the PRA 2014.

• At retirement, the Micro Pension Contributor has the option of transferring part or all of his outstanding balance on the contingent portion to his retirement benefits portion. 104

iv. Conversion from micro pension plan to mandatory contribution plan

• The micro pension contributor shall be eligible to participate under Section 2(1) of the Pension Reform Act, 2014 where the secures employment in the formal sector with an organisation that has three (3) or more employees.

• The micro pension contributor shall formally request for conversion, attaching all necessary documents specified in the guidelines for the registration of contributors/members issued by the commission.

• The micro pension contributor shall retain the existing RSA.

• Micro pension contributor may withdraw the total balance of the contingent portion of the RSA prior to conversion.

• Where the micro pension contributor chooses not to withdraw the contingent portion, the balance of the contingent portion shall be merged with the retirement benefits portion of the RSA prior to conversion.

• At conversion, the PFA shall move the micro pension contributor’s RSA balance to the appropriate fund under the multi-fund structure.

• Where an eligible contributor fails or refuses to request for conversion to the mandatory contribution after one (1) month of receiving remittance from the new employer, the PFA shall automatically change the status of the contributor upon receiving the second remittance.

• The PFA shall notify the employer of the status of the RSA of the contributor.

• The PFA shall forward monthly returns on conversion to the Commission.

Examiner’s report The question is in four parts. Part (a) of the question requires the candidates to explain the responsibilities of a micro pension contributor, while part (b) requires the candidates to enumerate criterial for eligibility to participate and document necessary requirements and registration for micro pension plan. Also, part (c) of the question requires the candidates to highlight the provisions of Pension Reform Act 2014 (as amended) on the administration of contingent withdrawals in a micro pension plan and part (d) requires the candidates to explain the conditions to be met for an individual to convert from micro pension plan to a mandatory contribution plan. 105 Few candidates attempted the question and their performance was below average. The commonest pitfall was the inability of the candidates to properly identify and explain the provisions of Pension Reform Act 2014 (as amended) as it affects micro pension plan. Candidates are advised to make use of ICAN Pathfinders and the Study Text for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Responsibilities of a micro pension contributor Identification of any five responsibilities 5

b. i Eligibility criteria for micro pension plan Any four eligibility criteria at ½ mark each 2 ii Documentation for micro pension plan Any four documents at ½ mark each 2 4

c. Provisions of PRA on contingent withdrawal Any six provisions 6

d. Conditions for conversion from micro pension plan to a mandatory contribution plan Explanation of any five conditions 5 Total 20

a. Processes of remitting contributions into Retirement Savings Account by contributors as in the PRA (2014): i. Every employee to whom this Act applies shall maintain an account, (in this Act referred to as “Retirement Savings Account”) in his name with any Pension Fund Administrator of his choice. ii. The employee shall notify his employer of the Pension Fund Administrator chosen and the identity of the retirement savings account opened under (i) above. iii. The employer shall:

• Deduct at source the monthly contribution of the employee; and

• Not later than 7 working days from the day the employee is paid his salary, remit an amount comprising the employee’s contribution under paragraph of this subsection and the 106 employer’s contribution to the Pension Fund Custodian specified by the Pension Fund Administrator of the employee. iv. Upon receipt of the contributions remitted under (iii) above, the Pension Fund Custodian shall notify the Pension Fund Administrator who shall cause to be credited the retirement savings account of the employee for whom the employer had made the payment; v. Where an employee fails to open such Retirement Savings Account within a period of six months after assumption of duty, his employer shall, subject to guidelines issued by the Commission, request a Pension Fund Administrator to open a nominal retirement savings account for such employee for the remittance of his pension contributions; vi. An employer who fails to deduct or remit the contributions within the time stipulated in (iii) above shall, in addition to making the remittance already due, be liable to a penalty to be stipulated by the Commission; vii. The penalty referred to in (vi) above shall not be less than 2 percent of the total contribution that remains unpaid for each month or part of each month the default continues and the amount of the penalty shall be recoverable as a debt owed to the employee’s retirement savings account, as the case may be; viii. An employee shall not have access to his retirement savings account or have any dealing with the Pension Fund Custodian with respect to the retirement savings account except through the Pension Fund Administrator; and ix. The Commission shall determine the cost of recovery of un-remitted contributions and the sources to defray the cost, which may include the amount recovered as penalty pursuant to (vi) above.

b. Categories of persons exempted from the Contributory Pension Scheme (CPS) as contained in the PRA 2014:

i. The categories of persons mentioned in Section 291 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) including the members of Armed Forces, the Intelligence and Secret Services of the Federation; ii. An employee who is entitled to retirement benefits under any pension scheme existing before the 25th day of June 2004 and has 3 or less years to retire (i.e. fully funded pension scheme); iii. Any person who falls within the provisions of (i) and (ii) above shall continue to derive retirement benefit under such existing pension scheme as provided for in the Second Schedule to this Act; and 107

iv. Where an officer exempted under (ii) above dies in service or in the course of duty, the Federal Government Pension Transitional Arrangements Directorate (PTAD) and the Federal Capital Territory Pension Transitional Arrangements Directorate shall cause to be paid, en- bloc to his next- of- kin or designated survivors, a gratuity and pension to which the officer would have been entitled at the date of his death calculated on the basis of applicable computations under the existing Pay-As-You-Go Pension scheme of the public service of the Federation and Federal Capital Territory.

c. Procedures for payment of retirement benefits to holders of Retirement Savings Accounts (RSA) as provided by the Act: i. A holder of retirement savings account shall upon retirement or attaining the age of 50 years, whichever is later, utilise the balance standing to the credit of his retirement savings account for the following benefits:

• Programmed monthly or quarterly withdrawals calculated on the basis of an expected life span;

• Withdrawal of a lump sum from the total amount credited to his retirement savings account provided that the amount left after the lump sum withdrawal shall be sufficient to procure a programmed fund withdrawals or annuity for life in accordance with extant guidelines issued by the Commission, from time to time;

• Annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments;

• Professors covered by the Universities (Miscellaneous Provisions (Amendment) Act, 2012 shall be according to the University Act; or

• Other categories of employees entitled, by virtue of their terms and conditions of employment, to retire with full retirement benefits shall still apply.

ii. Where an employee retires before the age of 50 years, the employee may request for withdrawal of lump sum of money of not more than 25% per cent of the amount standing to the credit of the retirement savings account, provided that such withdrawals shall only be made after six months of such retirement and the retired employee does not secure another employment. 108

iii. Where an employee has accessed the amount standing in his retirement savings account pursuant to (ii) above, such employee shall subsequently access the balance in the retirement savings account in accordance with (i) above.

iv. If an officer retires and is less than 50 years, on the advice of suitably qualified physician or properly constituted medical board, certifying that the employee is no longer mentally and physically capable of carrying out the function of his office, the officer may withdraw;

v. The medical board or suitably qualified physician, at the request of the employee, be made once in every two years to review the fitness of the employee and where the medical board certifies that he is now mentally and physically capable of carrying out the functions of his office, he may re-enter the scheme upon securing another employment.

vi. Any employee who disengages or is disengaged from employment before the age of 50 years and is unable to secure another employment within four months of such disengagement may make withdrawal from his retirement savings account in accordance with the provisions of section 7(2) and (3) of the PRA (2014).

vii. If the officer is retired due to total or permanent disability either of mind or body, may withdraw retirement savings account.

viii. Where the employee retires before the age of 50 years in accordance with the terms and conditions of employment, the officer shall be entitled to make withdrawals

Examiner’s report The question is in three parts and it relates to the provisions of Pension Reform Act, 2014 (as amended). Part (a) of the question requires candidates to explain processes of remitting contributions into Retirement Savings Account (RSA). Part (b) of the question requires the candidates to highlight the categories of persons exempted from the Contributory Pension Scheme (CPS), while part (c) requires candidates to explain the procedures for payment of retirement benefits to holders of Retirement Savings Account (RSA). Majority of the candidates attempted the question and their performance was average. The commonest pitfall was the inability of the candidates to properly identify and explain the provisions of Pension Reform Act 2014 (as amended). 109 Candidates are advised to read widely and ensure they have adequate knowledge of the relevant sections of the syllabus. They should also make use of Pathfinders and the Study Text of the Institute and other relevant learning materials on this aspect of the syllabus for better performance in future examinations.

Marking guide Marks a Processes of remitting contributions into Retirement Savings Account by contributors Explanation of any six processes of remitting contributions 6

b. Categories of persons exempted from the CPS as contained in the PRA 2014: Any four categories of persons exempted at 2 marks each 8

c. Procedures for payment of retirement benefits to holders of Retirement Savings Accounts Explanation of any six procedures 6 Total 20

a. Benefits of e-payments and e-collection e-Payment i. Provides complete and timely information on government cash resources; ii. Improve operational control on budget execution; iii. Enables efficient cash management; iv. Reduces bank fees and transaction costs; v. Facilitates efficient payment mechanisms; vi. Improves bank reconciliation and quality of fiscal data; vii. Improves liquidity of government; viii. Allows issuance of warrants and AIEs based on cash plan; e-Collection i. It controls and monitors receipts and payments of FGN funds; ii. It prevents and detects potential and actual fraud; iii. Its improves planning through MTEF; iv. Avoids double payments and likely build- up of payment arrears; v. Creates an accurate cash flow statements that help government to obtain an appropriate line of credit; vi. Implements cash collection acceleration techniques; vii. Integrates policy priorities into annual budgets and thereby ensures that available resources are channelled to priority sectors; 110

ix. No more commercial bank accounts maintain by MDAs; x. Brings about drastic fall on the ways and means (overdraft) requirement from CBN; and xi. Supports government budget execution.

viii. Minimises deficits and borrowings within limits set by government; and ix. Improves transparency and accountability of all FGN receipts.

b. Conditions for approving supplementary funds The conditions under which such requests may be granted are as follows: i. Public interest The supplementary request must manifestly be in the public interest. This must genuinely be at addressing issues, which have generated interest or debate nationally. For example, the need to fund vaccination in a pandemic situation, which was not earlier, envisaged. ii. Urgency The need is so urgent that the additional provisions request cannot be deferred till the following year when it will be incorporated in the new estimates. For example, a war situation. iii. Unforeseen circumstances The need could not be foreseen when the current estimates were being approved. iv. Virement impracticable The money required cannot be sourced through virement

c. Examination of payment vouchers The checklist shall include: i. Are all paid vouchers and supporting documents stamped “PAID” and also stamped “CHEQUE SIGNED” to differentiate them from new vouchers? ii. Are cheque numbers entered on paid vouchers? iii. Are payment vouchers received in the Central Pay Office (CPO) through schedules controlled serially or through voucher movement register? iv. Are the payment vouchers properly checked? v. Is there adequate safeguard to ensure that payments are made only to the right people and for good consideration? 111

Examiner’s report The question is in three parts. Part (a) of the question requires candidates to enumerate the benefits of e-payment and e-collection of the components of Treasury Single Account (TSA). Part (b) of the question requires the candidates to explain the conditions that need to be met for supplementary funds to be approved and part (c) of the question requires the candidates to create a checklist on how to examine payment vouchers. Majority of the candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to explain the conditions that need to be met for supplementary funds to be approved, while in part (c), the candidates were unable to create a checklist on how to examine payment vouchers. Candidates are advised to read widely and ensure they have adequate knowledge of relevant regulations relating to public sector accounting for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Benefits of TSA components Any five benefits of e-payment 5 Any five benefits of e-collection 5 10

b. Conditions for supplementary fund approval Identification of any three conditions 3 Explanation of conditions identified 3 6

c. Examination of payment voucher Stating any four checklists 4 Total 20 112

SECTION C

a. Definition of public debt The total amount of loan raised by government directly or through any of the authorised agencies is known as public debt. The loan could be raised within the domestic economy, in which case the creditors are mostly citizens or from outside the economy, in which the creditors are foreigners. The former is commonly known as domestic or internal debt, while the latter is known as external or foreign debt. In other words, public debt can be defined as total outstanding financial obligations of a government during a given period. It is an important source of capital formation, most especially in developing economies like Nigeria where the low level of income is insufficient for consumption and hence does not permit sustainable savings. Public debt may be bilateral or multilateral. It is bilateral where the creditors are governments of a given country. For example: i As at March 2024, Nigeria owed China $5.05 billion; ii France $652 million; and iii Germany $125.62 million in bilateral debts. It is multilateral when multilateral institutions are the creditors for example: i World Bank; ii International Monetary Fund (IMF); iii Islamic Development Bank (IsDB); iv European Development Bank; v International Fund for Agricultural Development; vi International Development Association (IDA); and vii The African Development Bank (AfDB).

b. Under certain circumstances, debt financing becomes either necessary or preferable. i During war and other emergencies, when there is need for large pool of funds and additional tax revenue cannot be raised, debt financing becomes inevitable. ii Where actual tax receipts are falling much below the anticipated volume, while expenditure is not showing a corresponding reduction. iii Debt financing can be tied to a project where 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 113 receive. For instance, a particular irrigation project might benefit the farmers of a particular area. In this case, the cost of the project can be met through borrowing and then recovered from the beneficiaries through a levy or some other means. iv Governments can use debt financing in situations of economic depression to help the country. v Government can avoid negative effect of taxes on incentives through borrowing especially when tax burden is significantly high.

c. Reasons advanced to justify the need for public debts The following are some of the reasons that have been advanced to justify the need for a country to borrow: i Huge and persistent budget deficit: The government borrows when its expenditure is greater than its revenue (budget deficit), especially after its taxing capacity has been stretched to the limit. ii Balance of payments disequilibrium: Excessive reliance on foreign resources to sustain domestic production processes and on foreign goods and services beyond the nation’s foreign exchange earning capacity may lead government into contracting debt obligations. iii Rapid population growth: In most developing countries, population is growing faster than the level of national output. The need arises for government borrowing to expand public enterprises and public utilities to cater for the welfare of the people. iv Implementation of development programmes: To promote economic development usually requires provision of new and upgrading of existing social and economic infrastructural facilities like roads, railways, electricity, schools and hospitals. The tax revenue of government may be insufficient to execute such projects, hence the resort to borrowing. v Economic instability: A stable economy naturally provides an enabling environment for economic growth and development. Public debt of the internal type may be contracted to control inflation, while both internal and external borrowings may be used to stimulate economic activities during economic depression. vi Natural disasters: Government has the responsibility to provide relief to victims of natural disasters, such as earthquakes, floods and fire disasters, famines, sectarian violence and other natural calamities. Government borrowing may be justified because such occurrences are never expected nor budgeted for. vii Fluctuations in government revenue: Most countries operate mono cultural economies depending on only one (or very few) export product 114 for foreign exchange earnings. A sudden poor performance of such product in the international market would reduce income considerably and adversely affect budget implementation. Any country that finds herself in such a situation may have no option than to borrow to bridge the financial resource gap. viii War-time borrowing: Financial resources needed to prosecute wars are usually beyond the capacity of government. Hence, the need to borrow arises to avoid devastating consequences of defeat. ix Debt servicing: New debt with favourable terms and conditions may be undertaken to service old debts thereby reducing the burden of debt on the economy.

Examiner’s report The question is in three parts. Part (a) of the question requires the candidates to explain the concept of public debt “distinguishing between bilateral and multilateral debt”. Part (b) of the question require the candidates to explain the conditions under which debt finance would be preferable, while part (c) requires the candidates to identify and explain reasons to justify the need for public debts. Majority of the candidates attempted the question and their performance was very good. The common pitfalls were the inability of the candidates to distinguish between bilateral and multilateral debt, while in parts (b) and (c) few of the candidates could not satisfactorily explain the conditions under which debt finance would be preferable and explain reasons to justify the need for public debts respectively. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Concept of public debt Explanation of the concept of public debts 2 Distinguishing between bilateral and unilateral debts 2 One example each. 2 6

b. Conditions under which debt finance would be preferable Explanation of two conditions at 1½ marks each 3

c. Reasons advanced to justify the need for public debts Identification of any four reasons at ½ mark each 2 Explanation of any four reasons identify at 1 mark each 4 6 Total 15 115

Factors to justify the need for public enterprises: i Market failure: The operation of market mechanism presupposes that the economic activities are guided by rational expectation, that is, profitability. However, there are differences in endowment which in most cases determines productivity and returns. Therefore, public undertakings are required in areas of the economy which the government deems necessary or very crucial, but which investors may not be willing to touch because of the huge capital and risks involved in such ventures. Furthermore, investment in such areas of the economy may take a longer time to materialise. It is for these reasons that public enterprises are established to operate in such essential industries of the economy . ii Merit goods: The goods or services considered to be of utmost necessity such as education, health care services, water supply and the likes cannot be left in the hands of private investors. They would be under-supplied because consumers would not be able to pay the market prices of these goods. Generally, the supply of such services should be adequate and should be available at low or near zero prices in order to encourage more consumption or participation. In the case of education, for example, the government may insist that every child up to a certain age must benefit from free education. In some cases, free medical services are provided for certain categories of people such as pregnant women as well as people over 75 years. But when private investors dominate the provision and supply, the prices may be beyond the reach of the people. For example, private tertiary institutions in Nigeria embark on aggressive advertisement for students, whereas, public tertiary institutions are burdened with over-population. Hence, the need for these services to be provided by government through the establishment of public enterprises thereby making prices become bearable for the populace. iii Strategic or security consideration: Sometimes, governments set up public enterprises because of the very nature of the projects. Currency and mint, for example 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 public enterprises. iv Promote growth of the economy: Usually, the objective or goal of the government is that the country should grow and develop at an optimum rate. This happens if the various components of the country have steady access to 116 capital stock which may not be readily available through market mechanism. Therefore, public undertakings directly add to the capital assets of the economy in the form of roads, bridges, factories and the likes. Without public undertakings, certain areas of the country’s economy may be starved of the capital they require to function even though such areas of the economy are very important. Hence, another reason why public enterprises are established is to inject capital into areas of the economy which ordinarily private investors may shy away from. The establishment of an Agriculture Development Bank, Bank of Industry are examples to ensure that capital is provided for investors in those sectors that lack funding. v 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, indirectly, the movement of the economy can be guided. vi Natural resources: One of the potent reasons for public undertakings is the case of some natural resources like forests, mines, and so on. 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 expected. This may result in a large scale and quick denuding of the land thereby causing soil erosion and upsetting the ecological balance. A public enterprise or undertaking given the same task would operate based on a defined systematic policy of extraction thereby avoiding damage to the soil structure and environment.

Examiner’s report The question requires candidates to discuss factors to justify the need for public enterprises. Majority of the candidates attempted the question and their performance was above average. The common pitfalls were the inability of few candidates to identify and explain factors to justify the need for public enterprises. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the future examinations. 117

Marking guide Marks Marks Factors to justify the need for public enterprises: Identification of any five factors 5 Explanation of the five factors identified at 2 marks each 10 15 Total 15

a. The following are the measures open to a Federal Government in intervening in the activities of an economy:

i. Fiscal policy It relates to government expenditure and tax measures aimed at controlling aggregate demand and hence the economy. It may be expansionary or contractionary depending on the objective(s) being pursued. Its components include taxation, expenditure, national budget, borrowing or public debt and subsidies

ii. Monetary policy This refers to the conscious and deliberate action on the part of the monetary authorities to control money supply, the general credit availability, the direction and cost of credit within the economy. It is aimed at influencing intermediate variables for the purpose of manipulating target variables. It comprises the use of measures such as open market operations, cash reserve ratio, liquidity ratio, bank rate or discount rate, credit ceiling, sectoral allocation, moral suasion and mandatory deposit.

iii. Commercial policy It relates to a set of rules and regulations that influence the country’s imports and exports. It consists of tariffs, quotas and other form of trade restrictions design to promote exports, generate income and employment and restrict imports in order to reduce commercial deficits.

b. The following steps are required to be taken by the Federal Government or its agencies before seeking the approval of the National Assembly on their request for external borrowing:

i. The FG must seek approval of the annual borrowing programme;

ii. Approval of the terms and conditions of external loans as contained in the annual borrowing programme must be sought by the FG;

iii. The FG must seek approval of overall limits, for the amounts of consolidated debt of the federal, state and local governments, to be set 118 by the President on the advice of the Honourable Minister of Finance (HMF); and

iv. There must be prior authorisation in the Appropriation or other Act or Law for the purpose for which the borrowing is to be utilised.

c. Requirements for raising fund from the domestic market by state governments. In order to raise fund from the domestic capital market, a state government must conform to the requirements of the Investment and Security Act, 2007 as stated below:

i. Compliance with constitutional provisions: In accordance with Section 120 of the 1999 Constitution (as amended), state governments must ensure any borrowing is approved by the State House of Assembly. Borrowing must align with the legal framework governing public finance and borrowing in Nigeria.

ii. Approval from the Federal Government: As per the Debt Management Office (DMO) Act, 2003, state governments must obtain approval from the Federal Ministry of Finance through the Debt Management Office (DMO) before accessing the domestic capital market.

iii. Adherence to the Fiscal Responsibility Act (FRA) 2007: The FRA imposes specific requirements on borrowing by state governments:

• Borrowing must be strictly for capital expenditure or human development projects.

• The loan must demonstrate clear economic benefits.

• The state must show a viable repayment plan, ensuring debt sustainability.

iv. Debt Sustainability Analysis (DSA): The DMO conducts a debt sustainability analysis to assess whether the state’s existing debt profile and proposed borrowing are sustainable.

v. The consent of the Federal Ministry of Finance to state’s request to borrow from the capital market

vi. Credit worthiness and credit rating: States are typically required to obtain a credit rating from a recognised agency to demonstrate their financial capacity and repayment ability. A 119 profile of the assets and liabilities of the state in the last five years in addition to a 5- year projection

vii. Preparation of an offer document (Prospectus): A profile of the state showing its population, major industries, their locations and other major projects embarked upon. The information has to be submitted with an application to the Securities and Exchange Commission (SEC) as well as the Nigerian Exchange Limited (NGX)

viii. Registration with the Securities and Exchange Commission (SEC) The borrowing programme must be registered with the Securities and Exchange Commission (SEC), which is responsible for regulating the Nigerian capital market.

ix. Applications to Securities and Exchange Commission (SEC): The application shall, amongst other documents, be accompanied by an original copy of an irrevocable letter of authority giving the Accountant General of the Federation the authority to deduct at source from the statutory allocation due to the body, in the event of default by the body in meeting its payment obligations under the terms of the loan and the relevant trust deed.

x. Legislative approval The borrowing must be approved by the state’s legislature, ensuring that it aligns with the state's budgetary and developmental priorities. Legislative approval provides legal backing for the issuance of bonds or other securities.

xi. Open and transparent bidding process States may be required to conduct an open and transparent bidding process for the selection of financial advisors, underwriters and other intermediaries in the borrowing process.

xii. Collateral or revenue backing The state may need to provide guarantees, such as internally generated revenue (IGR) or statutory allocations from the federation account, as security for the borrowing.

xiii. Adherence to capital market rules The borrowing must comply with capital market rules, including listing requirements for bonds on the Nigerian Exchange (NGX) or Financial Market Dealers Quotation (FMDQ) Exchange. 120

xiv. Engagement with professional advisors States must engage professionals such as financial advisors, issuing houses and legal counsel to structure and manage the borrowing process effectively. These professionals ensure compliance with legal, financial and market standards.

xv. Independent revenue verification States must demonstrate adequate revenue-generation capacity to repay the debt. Verification by independent auditors may be required to confirm revenue streams.

xvi. Alignment with development goals Borrowing plans must be tied to specific developmental projects, ensuring alignment with the state's medium to long-term goals.

Examiner’s report The question is in three parts. Part (a) of the question requires candidates to explain the measures open to Federal Government in intervening in the activities of an economy. Part (b) of the question requires the candidates to enumerate the steps that the Federal Government or its agencies must take before seeking the approval of the National Assembly on their request for external borrowing, while part (c) of the question asks the candidates to identify the requirements for raising funds from the domestic capital market by state governments. Few of the candidates attempted the question and their performance was poor. The commonest pitfall was the inability of few candidates to enumerate the steps that the Federal Government or its agencies must take before seeking the approval of the National Assembly on their request for external borrowing. Also, few candidates were unable to identify the requirements for raising funds from the domestic capital market by State Government. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examination. 121

Marking guide Marks Marks a. Measure used for intervening in the economy by FG Identification of any two measures 1 Explanation of any of the two measures identified at 1½ marks each 3 Any example of each of the two measures at ½ mark each 1 5

b. Measures to be taken before seeking approval of NASS for external borrowing Identification and explanation of any four measures 4

c. Requirements for raising funds from domestic market by state government Any four requirements identified at 1½ marks each 6 Total 15 122 ICAN/242/Q/B6 Examination No......................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2024 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 any other COLOUR OF INK will not be marked.

8. You are required to attempt Question ONE (compulsory), any TWO Questions in Section B and any Two questions in Section C.

9. Check that you have collected the correct question paper for the examination you are writing. THURSDAY, NOVEMBER 21, 2024 123 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA