Public Sector Accounting and Finance · May 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